Question

What causes a change in Quantity Demanded?

What is the difference between a Normal Good and an Inferior Good? Give an example of each.

Why is the market system also referred to as the price system?

Answer 1

A change in the quantity demanded is caused by the change in the price where increase in price leads to decrease in quantity demanded and vice versa in a normal good.

In a normal good, the decrease in price of one commodity leads to increase in consumption through positive income and substitution effects. For example, chocolates is an example where if the price decreases consumption increases. Inferior goods are the goods where if the price decreases, the consumption isn't increased by that much expected due to the positive substitution effect and negative income effect. Example- Low quality food grains, if your income rises you'll stop consuming low quality food grains.

In market system, the market forces such as price determines the level of demand or supply where price rationing means allocation of goods and services with respect to prices take place in market system where price is the most important factor and that is the reason why it is also called as the price system.