When the price of a product changes, it affects the consumption behavior of the consumer. This change in consumption is called the price effect or the total effect of price change.
Here, the price of only one product changes. For example, a student's monthly allowance is $100 for books and snacks. The price of a book drops from $20 per unit to $10 per unit, while the price of snacks remains at $5 per unit. This affects the budget constraint or the budget line. Now, the student can purchase ten books by spending his entire allowance on them. This rotates the budget towards a new budget line. After the price decreases, the student can make purchases anywhere on the new budget line.
When the price of books drops, the usual response from the student would be to purchase more books. However, how this change in the price of the books affects the consumption of both goods can be understood by learning about two effects. These are the substitution effect and the income effect.
