Why is there an inverse relationship between the price of a commodity and its quantity demanded?
Why is there an inverse relationship between the price of a commodity and its quantity demanded?
When the price of a good falls, it has the following two effects that lead a consumer to buy more of that commodity.
(i) Income effect: When the price of a commodity falls, the real income of the consumer, i.e., his purchasing power increases. As a result, he can now buy more of a commodity. This is called income effect. This causes increase in the quantity demanded of the good whose price falls.
(ii) Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than others. This induces the consumer to substitute the cheaper commodity for the other goods which are relatively expensive. This is called as the substitution effect. This causes increase in quantity demanded of the commodity whose price has fallen.
Thus, as a result of the combined operation of the income effect and substitute effect, the quantity demanded of a commodity increases with a fall in the price.
When the price of a good falls, it has the following two effects that lead a consumer to buy more of that commodity.
(i) Income effect: When the price of a commodity falls, the real income of the consumer, i.e., his purchasing power increases. As a result, he can now buy more of a commodity. This is called income effect. This causes increase in the quantity demanded of the good whose price falls.
(ii) Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than others. This induces the consumer to substitute the cheaper commodity for the other goods which are relatively expensive. This is called as the substitution effect. This causes increase in quantity demanded of the commodity whose price has fallen.
Thus, as a result of the combined operation of the income effect and substitute effect, the quantity demanded of a commodity increases with a fall in the price.
