price effect is a combination of income effect and substitution effect .explain with the help of diagram.

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Robert · Accepted Answer

The Substitution Effect is the effect due only to the relative price change, controlling for the change in 
real income. In order to compute it we ask what is the bundle that would make the consumer just as 
happy as before the price change, but if they had to make their choice faced with the new prices. To find 
this point we consider a budget line characterized by the new prices but with a level of income such that 
it is tangent to the initial indifference curve. In the diagram on the next page, the initial consumer 
equilibrium is at point A where the initial budget line is tangent to the higher indifference curve. 
Consumption at this point is 11 units of good 1 and 8 units of good 2. After an increase in the price of 
good 1,

price effect is a combination of income effect and substitution effect .explain with the help of diagram.

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