When the price of a product increases, a consumer is able to buy less of it with a given money income. This describes: Law of Demand
- the cost effect
- the inflationary effect
- the income effect
- the substitution effect
Answer: the income effect
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What happens when the price of a product increases?
An increase in price almost always leads to an increase in the quantity supplied of that good or service, while a decrease in price will decrease the quantity supplied.
What is the income and substitution effect?
The income effect states that when the price of a good decreases, it is as if the buyer of the good's income went up. The substitution effect states that when the price of a good decreases, consumers will substitute away from goods that are relatively more expensive to the cheaper good.
Why do consumers buy less of an item when its price rises?
Supply is generally considered to slope upward: as the price rises, suppliers are willing to produce more. Demand is generally considered to slope downward: at higher prices, consumers buy less.
What happens when consumers react to an increase in a goods price?
The substitution effect occurs when consumers react to an increase in a good's price by consuming less of that good and more of other goods.