“If consumers buy less of a commodity when their incomes rise, they will surely buy less...

“If consumers buy less of a commodity when their incomes rise, they will surely buy less when the price of the commodity rises.” Explain this statement with the help of income and substitution effect?

Expert Solution

The income effect states that if the income of consumers will increase then he will start buying more of a good if it is a superior good. But in case of inferior goods, the consumer will search for a better product. Suppose a person buy normal clothes earlier but when his income increase then he will start buying better clothes than before. This is because income is linked with status. Thus he will buy less of those commodity which was purchased earlier because of low income. Suppose a person is presently using cooler and if income increased then he will prefer Air conditioner.

As far as substitution effect is concerned, if the price of a commodity increase then the buyer will search for a substitute. Thus the demand for the product whose price has been increased will be effected. Just for example, when price of sugar will increase then many people will start buying jaggery. This will negatively impact the demand for sugar.

Rahul Sunny answered 1 year ago

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