#6-revisiting-demand-function #cfa #cfa-level-1 #economics #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand #study-session-4
When the price of a good that a consumer has been buying falls, two things happen:
- The good becomes relatively cheaper as compared to other goods (more Consumer Surplus) thus, more of this good gets substituted for other goods in the consumer’s market basket.
- With the decline in that price, the consumer’s real income rises. Not the paycheck but the amount of goods that can be purchased.
So the consumer tends to buy more when price falls for both reasons: the substitution effect and the income effect of a change in the price of a good.