budget constraint, at a choice like H, Sergei consumes more cameras and fewer bats. In the central portion of

the new budget constraint, at a choice like J, he consumes less of both goods. At the right-hand end, at a choice

like L, he consumes more bats but fewer cameras.

The typical response to higher prices is that a person chooses to consume less of the product with the higher

price. This occurs for two reasons, and both effects can occur simultaneously. The substitution effect occurs

when a price changes and consumers have an incentive to consume less of the good with a relatively higher

price and more of the good with a relatively lower price. The income effect is that a higher price means, in

effect, the buying power of income has been reduced (even though actual income has not changed), which

leads to buying less of the good (when the good is normal). In this example, the higher price for baseball bats
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