world of economics

Income and substitution effects

Substitution Effect The drop in price has both a substitution effect and an income effect. The substitution effect is the change in food consumption associated with a change in the price of food, with the level of utility held constant. The substitution effect captures the change in food consumption that occurs as a result of the price change that makes...
world of economics

Elasticity’s of Demand: Price, Income and Cross-Elasticity of Demand

Elasticity measures the sensitivity of one variable to another. Specifically, it is a number that tells us the percentage change that will occur in one variable in response to a 1-percent increase in another variable. For example, the price elasticity of demand measures the sensitivity of quantity demanded to price changes. It tells us what the percentage change in the...
world of economics

law of demand

what is LAW OF DEMAND? The law of demand can be stated as, all other things remaining constant, the quantity demanded of a commodity decreases when it’s price increases and increases when price decreases. The law implies that demand and price are inversely related. Marshall states the law of demand as, ‘the amount demanded increase with a fall in price...
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