“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?

Solutions

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

Next > < Previous

Related Solutions

An economist is interested in studying the incomes of consumers in a particular country. The population...

An economist is interested in studying the incomes of consumers in a particular country. The population standard deviation is known to be $1,000. A random sample of 49 individuals resulted in a mean income of $16,000. Construct 99% confidence interval interval for the average income. Answer the following questions a. i) Sample mean = ? a. ii) critical value Z = ? a. iii) Standard error = ? a. iv) Margin of error = ? a. v)...

What are consumers responsibilities when they buy a product such as hot coffee or hot hamburgers?...

What are consumers responsibilities when they buy a product such as hot coffee or hot hamburgers? How does a company give consumers what they want and yet protect them at the same time? Minimal. 500 Words

When interest rates rise firms want to borrow less for new plants and equipment and households...

When interest rates rise firms want to borrow less for new plants and equipment and households want to borrow more for home-building. Select one: True False The sticky wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, real wages fall because nominal wages are increasing at a slower rate than the price level. Select one: True False Suppose the economy is in long-run equilibrium. If there is an increase in consumer...

A local economist is interested in studying the incomes of consumers in her city. The population...

A local economist is interested in studying the incomes of consumers in her city. The population standard deviation is known to be $1,000. A random sample of 50 individuals resulted in a mean income of $15,000. What is the width of the 90% confidence interval? Select one: a. $364.30 b. $728.60 c. $465.23 d. None of the suggested answers are correct. e. $232.60

When consumers have no choice but to buy from one firm (local utility, etc.): a) they...

When consumers have no choice but to buy from one firm (local utility, etc.): a) they usually end up paying too much for the good or service. b) government regulation is usually used to protect consumers. c) they will always get the good or service at the lowest price available. d) none of these occur.

Describe some of the personal and psychological factors that may influence what consumers buy and when...

Describe some of the personal and psychological factors that may influence what consumers buy and when they buy it. Are any of these factors particularly effective or ineffective on you? Explain why or why not.

1. Suppose the U.S. economy moves out of a recession and incomes rise. What will happen...

1. Suppose the U.S. economy moves out of a recession and incomes rise. What will happen to the equilibrium prices and quantities of normal goods? If price stays the same would that be equilibrium? Why or why not? What will eventually happen in the market? What happens to equilibrium price and quantity? Which quantity is affected and how do you know? Would your answer be the same if you were discussing inferior goods? Explain using supply/demand graphs. 2. Draw a...

The law of demand says that when the price of something goes down people buy less...

The law of demand says that when the price of something goes down people buy less of it (and vice versa), all other things being equal. Such a change is referred to as an increase in quantity demanded and is shown by a movement down along a given demand curve. By contrast, an increase in demand is shown by a rightward shift in the entire demand curve. 1. Some people seem to believe that there are goods for which the...

public transportation is an inferior good. if consumers' incomes decrease this will cause -demand for public...

public transportation is an inferior good. if consumers' incomes decrease this will cause -demand for public transportation to increase -demand for public transportation to decrease

Economists have traditionally assumed that consumers are rational: they use their incomes and time to make...

Economists have traditionally assumed that consumers are rational: they use their incomes and time to make themselves as well off as they can. But recent research shows that consumers also want to be treated fairly. Surveys have found that many consumers believe it is unfair for firms to raise the prices of some goods after a sharp increase in demand (for example, following a tropical storm) while the same increase in price following a decrease in supply is deemed to...

Subjects