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#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:
  1. 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.
  2. 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.

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6. REVISITING THE CONSUMER’S DEMAND FUNCTION
bstitution and Income Effects for a Normal Good The law of demand says that when price falls, quantity demanded rises; however, it doesn’t say why. We can answer that question by delving a little more deeply into consumer theory. <span>When there is a decline in the price of a good that the consumer has been buying, two things happen. The good now becomes relatively less costly as compared to other goods. That is, it becomes more of a bargain than other things the consumer could purchase; thus, more of this good gets substituted for other goods in the consumer’s market basket. Additionally, though, with the decline in that price, the consumer’s real income rises. We’re not saying that the size of the consumer’s paycheck changes; we’re saying that the amount of goods that can be purchased with the same amount of money has increased. If this good is a normal good, then increases in income lead to increased purchases of this good. So the consumer tends to buy more when price falls for both reasons: the substitution e


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