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remaining the same, the price rises relative to income.
Faced with a higher price and an unchanged income,
people cannot afford to buy all the things they previously bought. They must decrease the quantities
demanded of at least some goods and services.
Normally, the good whose price has increased will be
one of the goods that people buy less of. To see the substitution effect and the income effect
at work, think about the effects of a change in the
price of an energy bar. Several different goods are
substitutes for an energy bar. For example, an energy
drink could be consumed instead of an energy bar.
Suppose that an energy bar initially sells for $3 and
then its price falls to $1.50. People now substitute
energy bars for energy drinks—the substitution effect.
And with a budget that now has some slack from the
lower price of an energy bar, people buy even more
energy bars—the income effect. The quantity of energy
bars demanded increases for these two reasons.
Now suppose that an energy bar initially sells for
$3 and then the price doubles to $6. People now buy
fewer energy bars and more energy drinks—the substitution effect. And faced with a tighter budget, people buy even fewer energy bars—the income effect.
The quantity of energy bars demanded decreases for
these two reasons. Demand Curve and Demand Schedule
You are now about to study one of the two most
used curves in economics: the demand curve. And
you are going to encounter one of the most critical
distinctions: the distinction between demand and
The term demand refers to the entire relationship
between the price of a good and the quantity
demanded of that good. Demand is illustrated by the
demand curve and the demand schedule. The term
quantity demanded refers to a point on a demand
curve—the quantity demanded at a particular price. 9160335_CH03_p053-080.qxd 8:56 AM Page 56 CHAPTER 3 Demand and Supply Figure 3.1 shows the demand curve for energy
bars. A demand curve shows the relationship between
the quantity demanded of a good and its price when
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