• Contrast the substitution effect and the income effect

• Utilize concepts of demand to analyze consumer choices

• Apply utility-maximizing choices to governments and businesses

Just as we can use utility and marginal utility to discuss making consumer choices along a budget constraint,

we can also use these ideas to think about how consumer choices change when the budget constraint shifts in

response to changes in income or price. Because we can use the budget constraint framework to analyze how

quantities demanded change because of price movements, the budget constraint model can illustrate the

underlying logic behind demand curves.

How Changes in Income Affect Consumer Choices

Let’s begin with a concrete example illustrating how changes in income level affect consumer choices. Figure

6.3 shows a budget constraint that represents Kimberly’s choice between concert tickets at $50 each and
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