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Question 178:

With a fall in the price of a commodity, the demand for the commodity increases as it becomes relatively cheaper in comparison to other commodities. This effect is known as:

a) Substitution Effect
b) Income Effect
c) Law of Demand
d) Law of Diminishing Returns



Answer :

GinnyAnswer

Final answer:

The substitution effect and income effect work together to increase quantity demanded when a good's price decreases.


Explanation:

Substitution effect occurs when the price of a good decreases, leading consumers to buy more of that good and less of substitutes due to its relatively lower price. At the same time, the income effect states that the lower price allows consumers to buy the same goods as before and still have extra money for additional purchases. Both effects combined result in an increase in quantity demanded due to the price decrease.


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