Question

Own price increases are associated with decreases in quantity demanded, ceteris paribus. These decreases in quantity demanded are composed of two effects, the substitution effect and the ________________________ effect.

Answer 1

Answer:

Income effect

Explanation:

Own price increases are associated with decreases in quantity demanded, ceteris paribus. These decreases in quantity demanded are composed of two effects, the substitution effect and the Income effect.

We know as per the law of demand, price increases lead to decrease in the quantity demanded if factor remain constant.

Quantity demanded has effect of two other major factors:

• Subtitution effect.
• Income effect.

Subtitution effect: It is the price of subtitution goods & services also lead to increase and decrease of demand for any particular goods.

Example: Price of tea and coffee.

Income effect: It is the income of consumer that effect the demand of any goods & sevices, as with the increase in income of consumer, their demand for inferior goods decreases and demand for branded goods increases.

Example: Non branded clothes and branded clothes.