 Today's topic is the substitution effect and the example of the substitution effect. When we say the substitution effect, it means we want to assess the change in the quantity demanded or the change in the consumption of a consumer through the change induced by a price chain. So, in this curve, we will see that the consumer is having one consumption bundle and out of that consumption bundle, he is having the income that is fixed amount and the price of the other goods fixed and the price of one commodity it will vary for which we will assess its quantity demand change. So, when we measure this, it means consumer is having a fixed budget level and with this constraint, we have to maximize his utility. So, when we have to assess this change, we come up with the two things that the consumer initially was having a budget that was like this, his demand function was like this, but with the change in the price that the change of the price of X, it reduced so that now PX prime or the P prime it is less than PX, so we say that with the reduction in the price, now keeping the nominal income constant, consumers nominal income has not changed, but his purchasing power has increased and that purchasing power we express with the help of M prime and these two equations, now it provides that this will be his original expenditure, but with the change in the price of the commodity or the reduction, this will be the next expenditure or is the required expenditure level, so when we subtract these two equations from the each other means, we see that it is his previous bundle, that this is his bundle after the change and this was his expenditure of the bundle before the change, so when we subtract this, we come up this with the change in M prime minus M mean that is the change in the expenditure, so actually this is the required level of the expenditure or that required level of the purchasing power that we require to keep him on the keep him his utility level constant or to keep his consumption or to measure, so when we change in the purchasing power due to the change in this price, we come up that that is equal to the two things means amount of the good that was available to him at the initial level, multiply by the change in the price, it will be equal to the required level of the purchasing power that keeps him on the same utility level. Now we coming up to an example, if the consumer demand function is this and we see that the consumer is having initial income rupees 1200 and the initial price level 30, so utilizing this if we calculate consumer's initial demand curve is equal to the 14 packs of the milk or the commodity what we are having, if now the price of the commodity decreases to rupees 20, we can, here students we can calculate all these examples with the increase in price, and you can calculate it yourself, that how does the increase in price reduce the reduction, here we are dealing the price decrease case, so as soon as the price decreases up to 20 with utilizing the same demand function, then we calculated that now the consumer's demand has increased up to 16, so initially because if I say that we did it on the first level, it was 14 and what we have done now that is final stage if we say that after the price change, so it is 16, it means there is the change of the 2 in the manner of the positive that there is increase. Now this change in the quantity demanded is totally 2, but out of that what was the effect due to the substitution effect and what was due to the change in the income, we can calculate the substitution effect by calculating, we will have to see that with the change in price, what was the total required level of purchasing power of the consumer, now if we calculate that because the value of 30 and 20, then we have the change minus 10, which shows its reduction and the initial level of commodity was 14, it means now the change in purchasing power of the consumer is minus 140 and the consumer's required level of income is the one that is at least on the same purchasing power, it is calculated that it is 1060, now if we explain this, it means this amount of 1060 rupees is with the consumer and out of this 1060, if the bundle he was already purchasing that was 14, then if we multiply that 14 with the initial price, then its 420 rupees would have been spent and when we do it with the new price, then its 280 rupees would have been spent, when he was spending rupees 480, then he had 780 rupees to spend on other goods and with the change in price, again if we calculate from this new income, then he still has 780 rupees, it means even at this price, consumer is having sufficient amount that the previous 14 bundle has commodity X1, he can purchase it and even after purchasing it, he has sufficient amount left in the form of incremental price, so that incremental price is because of that now consumer will have the income effect and the first shift that will be substitution, so that substitution effect when we want to calculate it, then we have it because initially he was purchasing commodity, so now if we say that the consumer, he demand we are calculating, when his price has become 20 and his real income has become 160 rupees, so it means we will calculate the quantity demanded on 3 steps, one when the price was initial 30 and income was 1200 last that was price 20 and income was 160 and in between there was a stage where we calculate that the consumer was having this much amount and his amount will be calculated that now at this stage consumer has shifted and he has calculated that amount of 15.3 was calculated by him, so out of this we will see this was the change of only 153, so this was there was a shift of total effect was 2 and out of that total effect of change 153 change will be equal to the substitution effect.