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Chapter 6: Q. 3 (page 151)

Explain all the reasons why a decrease in a product's price would lead to an increase in purchases.

Short Answer

Expert verified

Due to substitution and income effect, a decrease in a product's price will cause a rise in purchases.

Step by step solution

01

Step 1. Introduction:

An individual seeks to raise consumption utility with respect to the budget constraint. When income or price fluctuates, the budget constraint paradigm suggests that a variety of solutions are feasible.

02

Step 2. Explanation:

A commodity price reduction has both a substitution and an income effect. The substitution effect states that because the product is less expensive in comparison to other items the consumer buys, he or she will buy more of it (and less of the other things). According to the income impact, after a price decrease, a consumer could buy the same things as before and yet have money left over to buy more. A fall in price produces a rise in quantity demanded for both reasons.

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Most popular questions from this chapter

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