Question

Hello I have these questions. I need good answers in order to undertand not so long nor so short please

1. Why are consumers willing to pay more for small portions?
2. What is the substitution effect of a higher price on a consumer?
3. What is the income effect of a higher price on a consumer?

Answer 1

Ans. 1. Consumers are willing to pay more for the small portions because they are less in quantity and consumers might feel that those items can get get finished in some time. Hence they pay more so that they are able to buy those limited goods and do not face shortage.

For eg : The quntity of oil is very less in the country but the demand is very much high , so the customer will try to pay more to buy that limited stock of oil so that he may not face shortage.

2. Substitution refers to buying an alternative good in place of an old one. If the price of a product has increased , the customer is more likely to buy a substitution or an alternative product for that and avoid the old product.

For eg : The price of tea increases suddenly , so the customers will start buying coffee in place of tea so that they can save some amount because tea is expensive to drink now.

3. If a product has increased its price, it is more likely that the person with lower income will stop buying it because he cannot afford it now. But if a person's income has increased, then he will buy the product for sure no matter how much the price increases.