ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -This option is correct because the income and substitution effect shows the downward sloping demand curve. It means as income rises then the purchasing power rises and quantity demanded rises due to the income effect. And, as price rises then the quantity demanded rises due to the substitution effect.

Detailed explanation-2: -The income and substitution effect can also be used to explain why the demand curve slopes downwards. If we assume that money income is fixed, the income effect suggests that, as the price of a good falls, real income – that is, what consumers can buy with their money income – rises and consumers increase their demand.

Detailed explanation-3: -2) Substitution effect When the price of coffee rises, consumers may switch to buying tea more as it will become relatively cheaper. Economists refer to this as the substitution effect. Hence, if the price of tea reduces, its demand will increase and the demand curve will be downward sloping.

Detailed explanation-4: -The slope of the demand curve (downward to the right) indicates that a greater quantity will be demanded when the price is lower. On the other hand, the slope of the supply curve (upward to the right) tells us that as the price goes up, producers are willing to produce more goods.

Detailed explanation-5: -The income effect expresses the impact of increased purchasing power on consumption, while the substitution effect describes how consumption is impacted by changing relative income and prices. These economic concepts concern changes in the market and how they impact consumption patterns for consumer goods and services.