This is a basic question but one that I realized I don’t know the answer to. Of course it should only count as a movement along the “demand curve” but still a decrease in price is equal to an increase in income so shouldn’t this boost out the “demand curve”? The same thing goes for supply -won’t a movement down the “supply curve” cause quantity to dimnish and lower the amount of firms in the market thereby shifting the supply curve backwards?
A decrease in price does not mean an increase in income. An increase in income actually causes a right-ward shift in demand increasing prices for any normal good.
But on the indifference curve which determines the demand one, isn’t a decline in price treated as a rise in income? Such that it is possible to have an income effect?
Prices don’t cause anything. They are the result.
The income effect, like the substitution effect, shows how an exogenous change to demand effects price. Again, as M(income) increases, demand will increase, and therefore price will increase, for any normal good. Movements along the demand curve only occur when you change the price: price up, Qd down, and vice versa.
but this is strange for following the latest addition of mankiw’s micro book, which I don’t have with me at the moment, it is said that if you have a trade-off between goods x and y, and the price for good x decreases, then on the indifference curve good x (assume it is on the x-axis and good y is on the y one) increases in quantity -the income line has a lesser negative slope. This could cause this line to shift forward to a high indifference curve. Check the book if you have it since that is probably where my misunderstanding lies. Regardless if you have the book, isn’t this a possible scenario?
Okay, this may be it, but I’m not too sure: Price of good X decreases, causing an increase in the Qd for good X (you’re buying more of good X). Your income should see its slope flatten out because your spending less per unit; the average rate of change, in your income, has fallen. I haven’t used indifference curves yet, I just started intermediate micro economics. I’m kind of used to marginal utility.