Question

Explain why a decrease in price leads to an increase in quantity demanded for a normal good. Name the terms describing what is happening and explain their meaning.

Answer 1

A decrease in the price has an impact on substitution and an impact on profits. The substitution effect means he or she will want to buy more of the product (and less of the other products) as the product is cheaper compared to other things the customer buys. The earnings impact means the buyer could purchase the same goods as before after the price drop, and still have money left over to buy more. For both factors, a decrease in price is causing the quantity demanded to increase.

The most common reaction when revenue falls is to buy less of both products. products and services are considered normal products when an increase in income leads to an increase in the consumed quantity of that good and a decline in income leads to a decrease in the consumed quantity.