case, the substitution effect would lead Petunia to choose less leisure, which is relatively more expensive, and more

income, which is relatively cheaper to earn. The income effect is the movement from C to B. The income effect in

this example leads to greater consumption of both goods. Overall, in this example, income rises because of both

substitution and income effects. However, leisure declines because of the substitution effect but increases because

of the income effect—leading, in Petunia’s case, to an overall increase in the quantity of leisure consumed.

Substitution and income effects provide a vocabulary for discussing how Petunia reacts to a higher hourly

wage. The dashed line serves as the tool for separating the two effects on the graph.

The substitution effect tells how Petunia would have changed her hours of work if her wage had risen, so that

income was relatively cheaper to earn and leisure was relatively more expensive, but if she had remained at
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