The Slope of the Demand Curve
We have now divided Tristan’s response to a change in the price of ice
cream into a substitution effect and an income effect. Of course, when the
price changes, Tristan moves directly from the initial consumption pattern
to the final one; we do not observe any “halfway” consumption pattern.
However, by breaking this movement into two parts for analytical
purposes, we are able to study Tristan’s total change in quantity
demanded as a response to a change in relative prices plus a response to
a change in real income.
What is true for Tristan is also true, in general terms, for all consumers.
The substitution effect leads consumers to increase their quantity
demanded of goods whose prices fall. The income effect leads consumers
to buy more of all normal goods whose prices fall.
Putting the income and substitution effects together gives the following
general statement:
Because of the combined operation of the income and substitution effects, the demand curve
for any normal good will be negatively sloped. A fall in price will increase the quantity
demanded.Figure 6-3 illustrates how the combination of the substitution effect and
the income effect determines the slope of any demand curve. In each part
of the figure, we begin at point A with the price We then consider a
p 0.