GK
BUSINESS ECONOMICS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Decrease or fall in the price of commodity leads to increase in demand because of
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Income effect i.e. Consumer becomes better off
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Substitution effect i.e. Relatively cheaper than related goods
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Both (a) and (b)
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None of these
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Explanation:
Detailed explanation-1: -The fall in the price of a commodity is equivalent to an increase in the income of the consumer because now he has to spend less for purchasing the same quantity as before.
Detailed explanation-2: -A fall in own price of the commodity leads to increase in real income of the consumer and a consquent increase in purchasing power of the consumer.
Detailed explanation-3: -As the income of the consumer increases, his purchasing power increases and therefore the demand of the given commodity increases. Similarly, when the income of the consumer decreases, his purchasing power contradicts and hence the demand of the given commodity decreases.
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