Answer to Question #117724 in Microeconomics for asad

Question

i. When the price of goods falls, and price of other goods and consumer income remain same what happen with consumption/demand of that goods whose price falls and other goods (both are substitutes for each other).

Answer 1

The effect of substitution arises when the changes in price and consumer incentives influence their consumption of goods that can be utilized in a place other than the other whose price has increased. Substitute goods such as Domino’s and Pizza Hut can be consumed in place of each other. When the price of Pizza Hut falls while the price of Domino’s remain the same at a constant consumer income, demand of Pizza Hut is likely to increase as most consumers would prefer Pizza Hut to Domino’s whose price would be relatively higher than Pizza Hut. The Demand of Domino’s will decrease.