of a good that you have been buying falls, then in effect your buying power has risen—you are able to purchase

more goods. Conversely, if the price of a good that you have been buying rises, then the buying power of a given
524 B • Indifference Curves

amount of income is diminished. (One common source of confusion is that the “income effect” does not refer

to a change in actual income. Instead, it refers to the situation in which the price of a good changes, and thus

the quantities of goods that can be purchased with a fixed amount of income change. It might be more accurate

to call the “income effect” a “buying power effect,” but the “income effect” terminology has been used for

decades, and it is not going to change during this economics course.) Whenever a price changes, consumers

feel the pull of both substitution and income effects at the same time.

Using indifference curves, you can illustrate the substitution and income effects on a graph. In Figure B4,
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