Explain how the income effect and the substitution effect are the reas

1.	Explain how the income effect and the substitution effect are the reasons for the downward slope of the demand curve.
Answer» Income effect: It occurs when the price change affects consumer purchasing power and thus lead to a change in quantity demanded. When the price of a commodity falls, the real income of the consumer increases, a part of increased real income may be used to buy more of the commodity under question. Thus, a fall in price of a commodity increases the demand for it. Substitution effect: When the price of a commodity falls and prices of its substitutes remain unchanged, it becomes relatively cheaper in comparison to the other commodities. Thus demand for relatively cheaper commodity increases as consumers normally like to substitute cheaper goods for costlier ones.

Explain how the income effect and the substitution effect are the reasons for the downward slope of the demand curve.

Answer»

Income effect: It occurs when the price change affects consumer purchasing power and thus lead to a change in quantity demanded. When the price of a commodity falls, the real income of the consumer increases, a part of increased real income may be used to buy more of the commodity under question. Thus, a fall in price of a commodity increases the demand for it. Substitution effect: When the price of a commodity falls and prices of its substitutes remain unchanged, it becomes relatively cheaper in comparison to the other commodities.

Thus demand for relatively cheaper commodity increases as consumers normally like to substitute cheaper goods for costlier ones.

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