The income effect explains why there is an inverse relationship between the price of a product and the quantity of the product demanded.

Question

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The income effect suggests that as the price of a product decreases, consumers feel as if their income has increased since they can now purchase more of the product for the same amount of money. This, in turn, prompts them to buy more of the product, which leads to an increase in the quantity demanded. Conversely, as the price of a product increases, consumers feel as if their income has decreased since they can now purchase fewer items with the same amount of money. As a result, they buy less of the product, which leads to a decrease in the quantity demanded. Therefore, there is a negative relationship between the price of a product and the quantity demanded of the product.

The Income Effect Explains Why There Is an Inverse Relationship