When the price of a product falls, the purchasing power of our money income rises and thus permits consumers to purchase more of the product. This statement describes

Question

Quizplus · Accepted Answer

The statement describes the income effect, which refers to the change in the amount of a good that a consumer can buy due to a change in their purchasing power caused by a change in the price of the good. When the price of the product falls, the consumer's income effectively increases, allowing them to buy more of the product. This is the income effect, which is different from the substitution effect, which describes the change in the quantity consumed of one good in response to a change in the price of another good, and the rationing function of prices, which refers to the role of prices in allocating scarce goods among consumers. The statement does not describe an inferior good, which is a good for which demand decreases as income rises, and thus is not the correct answer.

When the Price of a Product Falls, the Purchasing Power