world of economics
226 views

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
199 views

Elasticity 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
163 views

Law of Demand

What is the Law of Demand? The law of demand can be stated as, all other things remaining constant, the quantity demanded of a commodity decreases when its price increases and increases when the price decreases. The law implies that demand and price are inversely related. Marshall states the law of demand as ‘the amount demanded increases with a fall...
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