Create simple graphs without functional forms I am looking for a suggestion of programs that can be used to illustrate effects like the income/substitution effect with regards to the consumption choice etc. 

With many programs, need you to specify functional forms, but if you are just illustrating the effects it can be a hassle to conjure up some functional form to make a mere sketch of the effects.

And using paint is just... wrong... and ugly.
My main suggestions would be:


Adobe Illustrator, which will let you draw graphs freehand. This is a very powerful professional illustration tool that will allow you to produce crisp vector images (if you don't know the difference between a vector image and a raster image then you should look that up before starting).
PGF TikZ / PGFplots. This is my preferred way of producing figures. It requires that you code the figures (and therefore that you specify either a functional form or some points on the function), but produces extremely precise and crisp images. The main advantage of this approach, though, is that it is completely integrated with LaTeX. The fonts will match those in the rest of your document/presentation (assuming you are using LaTeX) and you don't need to mess around with any external files since the code can be included in your main LaTeX document.