When the price of a normal good falls, consumers buy a larger quantity because of the ________ effect and the ________ effect.

Question

Quizplus · Accepted Answer

When the price of a normal good falls, consumers have an incentive to substitute the good for other goods they would have purchased at a higher price. This is known as the substitution effect. Additionally, consumers' purchasing power increases as the price of the good falls, allowing them to buy more of the good (and possibly other goods as well). This is known as the income effect.

When the Price of a Normal Good Falls, Consumers Buy