Economics: Principles, Problems, and Policies, 19th Edition

Published by McGraw-Hill Education
ISBN 10: 0073511447
ISBN 13: 978-0-07351-144-3

Chapter 3 - Demand, Supply, and Market Equilibrium - Quick Quiz for Figure 3.6: 1


b - lower prices of a product create income and substitution effects that lead consumers to purchase more of it.

Work Step by Step

The demand curve is downward sloping due to the inverse relationship between quantity demanded and price. The income and substitution effect helps explain why the demand curve is downward sloping. For the income effect: as the prices of goods fall, a consumer has a higher real income and thus the quantity demanded of goods and services rises. For the substitution effect: as the price of one good falls, it becomes less expensive relative to other goods, assuming the other goods remain the same price, and thus people turn away from the other goods and towards the relatively cheaper one.
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