okay with this example uh we're going to do another income and substitution effects example but with the GIF and good so we're dealing with the normal two good economy um good a is going to be a normal good on along the vertical axis good B is going to be a gif and good along the horizontal axis GI and goods are similar to inferior Goods but uh they're this really paradoxical case where if the price of this good increases then we expect to spend more on that good uh conversely if the price of this good uh decreases we expect to spend less on this good um so let me show you how what that looks like in the two good economy uh with a an individual you know maximizing the utility over uh Max you know finding the optimal consumption bundle over two goods so first off since the GIF and good is such a paradoxical example I just kind of wanted to show you um what things look like with a normal good so with this diagram I'm drawn here um what we're doing is uh decreasing the price of good be so what we did is we started over at uh this budget line here um budget line sub one uh and then we had this old indifference curve IC sub one so we started off at this consumption bundle here uh it had some quantity of good a you know at this point about right here uh so we had some consumption of good a around this quantity right here uh and we had we started off with this quantity of consumption of good be right here uh and then we show a decrease in the price of good be so that's really easy to show all we have to do is push out the budget line to this point here so notice that the intersection along the quantity of good a AIS stays the same because the price of good a has not changed and income hasn't changed but because the price of good B is changed uh it's gone down it means that if we were to spend all of our money on good B we be able to consume more so this intersection shifts from this point over to this point and we have a new budget line over here so uh and then since this is a normal good we have a very normal looking indifference curve this indifference curve I tried to do draw as pretty much as parallel as possible to our initial budget line so we have our final consumption bundle after the decrease in the price of good be to this point here so we shifted from this point to this point uh given a decrease in the price of good be so we started off at this quantity of good be and we shifted to this quantity of good be so uh rather obviously um if the price of some good goes down we kind of expect our quantity of consumption of that thing to to go up uh similarly uh the quantity of consumption spent on good a was at this point and then we went down to this point given the decrease in the price of good be so basically we shifted away consumption a little bit um we could break down the shift from this point to this point into two effects the income and the substitution effect so first off the substitution effects um given that now good B is relatively less expensive than good a uh we expect some kind of shift in the consumption uh from Good a to good B so here the substitution effect is positive so as the um price of good be decreases we decrease our cons consumtion of good a from here to here and we increase our consumption to good B from this point to this point um and then the income effect is uh the effect well first off the substitution effect so this dotted parallel line here that we discussed in some other videos um this has the same relative prices as the final budget line um so BL sub two here is parallel to our new little hypothetical budget line so that means we had the same relative prices but we've shifted it inward so we've kind of like effectively taken away someone's income so from this point to this point we have identical relative prices um but the thing we've changed is this person's income kind of theoretically their income so shifting from here to here they're on the exact same indifference curve the only difference between this budget line and this budget line are the relative prices of good a and good B so that means the shift from here to here there's no income effect whatsoever it's all substitution effect the substitution of um because we've changed relative prices so as relative prices change you shift out of consumption of one good and shift into the consumption of another good so going from this point right here to this point right here it's all income effect you can see the relative prices are identical the only thing we've changed here is this person's the indifference curve that this person's on so the effect from uh Q uh BS to qb2 is all income effect which is positive normal Goods um so this is a decrease in the price of good B normal Goods you're going to have a substitution effect and an income effect that are going in the same direction given this decrease so now we're going to deal with a gif and good and the GIF and good is a very special case Okay so let's just start here uh we have our initial budget line and we have our initial difference curve and then what we're going to do is we're going to have a decrease in good be so to show a decrease in good be we need to draw a new budget line the new budget line um the intersection of the budget line over here is going to be identical because the price of good a uh is unchanged and we haven't changed income um where is the new budget line going to intersect this the horizontal axis over here um because there's a decrease in the price of good be that means the budget lines uh is going to end somewhere over here great so we've got our new budget line here um uh given the decrease in the price of good be so uh now where is the indifference curve what what's the new optimal consumption bundle so this is US GI and good so this is going to be a very special case so given the decrease in the price of good B what we're going to need to show is a decrease in consumption of good B so this point is going to have the the new intersection is going to have to hit the budget line the new optimal consumption bundle is going to have to be somewhere along this point over here so um so once again given a decrease in the price of good be because this is a GI and good we're going to have to show a decrease in the consumption of good be so the indifference curve is going to have to intersect our new budget line somewhere in this area over here cool so this is our new indifference curve this red line where along here um given the decrease in the price in good be we have this new optimal consumption bundle over here and note how I drew the budget the uh the new indifference curve in this super odd special way so from here to here the distance is huge and then for the difference between these two indifference curves here and here is just minute like there's basically a pixel difference between the two indifference curves and that by drawing the indifference curves that way we show that this this is a GI and good so going from this point to this point we're decreasing our consumption of good B and you can see how this is a paradoxical uh case because we've decreased the price of good be and yet we are decreasing our consumption of good be and that's super unusual usually if the price of something goes down in general people consume a bit more of it uh okay so now let's break down um the move from here to here into two effect the income effect and the substitution effect so first off um you know how do you show that difference between the income effect and the substitution effect how do you break down the move well what you do is you start with the final budget line BL sub2 and what we're going to do is draw a line that runs parallel to BL sub 2 okay so that line which I have here in a dotted line um this line here has the same relative prices as our final budget line uh and if you remember if you increase someone's income you know you keep the same relative prices uh you just shift the U budget line out parallel similarly if you were to take away someone's income you would shift in the budget line inwards because the the same relative the prices the relative prices are the same so this line right here has the same relative prices but allows us to kind of shift incomes around and what we're going to do is we're going to move this new budget line so that it's parallel at some point to the old indifference curve so I'm going to shift this until I could find a point where it's parallel to the old difference curve say about right there and the bundle of that point is about right here at Q to the B Subs so from this point here to this point here so that is to say the shift of consumption of qu of good be from here to here is all the substitution effect so notice that we've kept them on the same indifference curve so effectively we've kept them at identical income and all we've done is change relative prices remember that the price of quantity of good B changed so we just shifted relative prices to show uh what the substitution effect is given those change in prices since good B is now relatively cheaper than good a we've shifted consumption away from a so from here to here is the decrease in consumption of a and the shift from this point to this point that is to say from uh qb1 to QBs is all the substitution effect and it's a positive effect given that the price of couldb has gone down now the income effect is the move from this point here QBs to this level over here qb2 so going from QBs to qb2 the income effect which is negative so from here to here uh we saw or you I have another video just for inferior Goods um and we've already seen Inc that are negative that's just the definition of any uh inferior good but note that from here to here this distance from QBs to qb2 is greater than the distance from here to here so the substitution effect uh which is a positive effect is less than income effect the negative effect so the definition of the giffing good is that the negative income effect is more than the positive substitution effect so the income effect for this inferior good if the income effect for this inferior good overpowers the substitution effect then we have a GI and good so paradoxically here we have a situation where um given a decrease in the price of something we are decreasing the consumption of this U real world examples Wikipedia about the uh Potato Famine the example I heard um is like prices of electricity in the winter in like really cold places I know they say like University of Wisconsin Madison it's so cold there that you spend you usually spend so much money on heating for example so uh you know over the winters people spend a lot of money on heating their house in the winter um and the idea is that if the price of heating goes down you know of gas or electric goes down um then people are give enough have enough money so that they can vacation some kind of warmer climb so by taking the vacation and going else uh they spend less money on Heating in the first place so uh with that example the price of heating goes down which allows people to spend more money on this alternative you know like traveling to another place so that they didn't have to spend money on Heating in the first place where if the price of heating uh went up um then they wouldn't be able to afford those Vacations or longer vacations uh in warmer areas in the first place meaning they had to stay home more and then spend money on Heating in the first place um giing goods are really rare so try not to think too intuitively about it but there's a couple examples that you know theoretically I guess could exist um hopefully this is helpful I try to kind of go into one of the more really technical examples but if you have any questions let me know thanks and have a good day