In the confines of the budget constraint L1
In the confines of the budget constraint L1, the consumer chooses an optimal bundle on the indifference curve i1.When the price of A rises to pA2, the budget constraint rotates inwards becoming L2=pX2*X2+pY*Y2, and the optimal consumption bundle of the consumer falls on a lower indifference curve at equilibrium e2.Iincreasing the income of the consumer to take them back to their original indifference curve i1 constitutes the concept of compensating variation(CV).Therefore, using CV to create a new budget constraint L*=CV+L2=px2*X3+pY*Y3and a new optimal bundle e* on the original indifference curve i1.The corresponding changes in the optimal consumption bundle from e1 to e* is the substitution effect while the increase from e2 to e* is the income effect. The total of the changes in equilibrium constitute the total effect on the total equilibrium quantities.
