ECONOMICS
ELASTICITY OF DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Substitution and Income Effects
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Doppler and Lake Effects
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The Ability and Desire Effect
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The Substitution and Elasticity Effect
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Detailed explanation-1: -The law of demand states that quantity demanded increases when price decreases, but why? Two reasons why the demand curve slopes downward are the substitution effect and the income effect. The income effect states that when the price of a good decreases, it is as if the buyer of the good’s income went up.
Detailed explanation-2: -Price Effect = Substitute Effect + Income Effect.
Detailed explanation-3: -To sum up, as the price of a commodity falls people may buy more of it for two reasons: (1) It is cheaper (substitution effect). (2) The fall in price in effect leaves more income with the consumers to spend (income effect).
Detailed explanation-4: -Definition: The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any good and service are inversely related to each other. When the price of a product increases, the demand for the same product will fall.
Detailed explanation-5: -As the price of the commodity falls, the real income of the consumer increases. This induces the consumer to buy more of the same commodity. This is known as Income Effect. The demand curve slopes downwards from left to right because of the substitution effect also.