Question

1. a. Suppose the price of gasoline increases. What will happen to quantity demanded? What do you think best explains the change in quantity demanded? b. Suppose the price of a brand of face cleanser increases. What will happen to quantity demanded? Which of the two reasons, income or substitution, do you think best explains the change in quantity demanded?

Answer 1

This question emphasise the economic theory of Price elasticity of demand. The theory of Price elasticity of demand is one of the important theory in economice.This tells how consumers demand change according to the changes in price.

A) The first question is about increasing of the price of gasoline. According to price elasticity of demand  if an increase in price have to cause a decreace of quantity demand. But in this case thats will not work properly. In today life majority of us using vehicles if an increase in gasoline didnt effect our consumption. vehicle and gasoline are complimentry items. We have more comfort to use our private vehicles so if price hive we will not reduce our consumption of gasoline. This is because the lack of substitute commodity for gasoline.  

The below diagram shows less decrease in quantity demand.

B) In the second case the product is a face cleaner brand. Its only tells about a single brand. In society there are a lotoff other brands also on other hand face cleaner is not a necessery item it is necessary only for countable numbers. So in this case the law of price elasticity of demand is applicable. When price of a perticular brand face cleaner increase the quantity demand will definitly decrease, some of the customers will stop consumption of that others will shifted to it's substitutes.

Due to the lack of increased income the peoples started to cosume it's substitute products.