00:01
So the normal way that we analyze a consumer choice problem is with a budget constraint, right? the budget line tells you what you can afford, right? and then the consumer picks the point which maximizes their indifference curves, right? so this consumer with this budget is facing y zero, x zero and y zero.
00:25
That's their optimal choice.
00:27
So now let's imagine that the price of x falls.
00:32
What does that mean in terms of the budget line? it means you can afford more x, right? so the budget line would rotate something like this, right? as you can afford more x.
00:47
And that means the consumer would re -optimize to a new indifference curve, right? at the different budget constraint.
00:54
So once you get your new budget, you re -optimize, right? you look at what you're buying and you think, is that the best option? so the income effect says that you are richer, right? you are richer because your income can buy more stuff, right? for a normal good, that means you buy more, buy more, right? your income, your real purchasing power is increasing...