Pure substitution effect

Pure substitution effect - in microeconomics means the adjustment of demand, ie the consumer basket of goods, to the new price relationship of those goods, as a result of a reduction or increase in their prices, assuming that the consumer retains the current standard of living, to adjust his income.

The above picture shows the situation in which the consumer assumes the choice between two goods: the film and the meals. The primary consumer choice is C, where he earns Mc a meal and Fc movies, his indifference curve is U2U2 and budget constraint is AF. In the case of rising food prices, there is a change in the price ratio of meals-films, whereby the new budget constraint is the AF line and the new indifference curves are U1U1. In the new reality, the consumer chooses me meals (less than before, Me & gt; Mc) and Fe movies (more than before, Fe & lt; Fc). The new selection corresponds to the point E on the graph. The change in the price of one of the goods leads to a new choice for the consumer, which is in fact the result of the substitution effect and the income effect.

With the described change in the price of meals, the pure substitution effect in the graph above is the shift of consumer choice from primary point C to point D. In point D, the consumer's standard of living expressed in the indifference curve remains unchanged. The consumer budget line is changed from the original simple AF to the new simple position in the graph marked as HH by the change in the relation of meal and film prices (turnover relative to the coordinate system) and the adjustment of the consumer's income (horizontal offset to the coordinate system). p>

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