When the price of a good falls relative to other goods and the consumer consequently buys more of this good, what is this referred to as?
A) the income effect
B) the substitution effect
C) the net effect
D) the complement effect

Question

Quizplus · Accepted Answer

This is referred to as the substitution effect, where the consumer substitutes the now relatively cheaper good for other goods that are now relatively more expensive. This leads to an increase in the quantity demanded of the cheaper good. The income effect refers to the change in quantity demanded due to changes in income, while the complement effect refers to the change in demand for a good due to changes in the price of a complementary good. The net effect is a general term that can refer to the overall impact of multiple effects.

When the Price of a Good Falls Relative to Other