When the price of a product increases, consumers shift their purchases to other products whose prices are now relatively lower. this statement describes rev: 05_02_2018 multiple choice an inferior good. the rationing function of prices. the substitution effect. the income effect.

The correct answer is: the substitution effect.

Explanation:

The price of a product is inversely related to the quantity demanded. An increase in the price of the product decreases the purchasing power of the consumer.  

So in case of a price rise, the consumers move to a product at a lower price. In other words, the consumers substitute a good at lower price.  

The income and substitution effect causes the demand curve to be downward sloping.

SUBSTITUTION EFFECT

Explanation:

Substitution Effect is the effect refering to change in consumption pattern due to change in relative prices .

Generally , it means that consumers SUBSTITUTE / replace dearer (expensive) goods by cheaper ones .

This can be explained as per relative comparison of their ratios .

Good A price = 5 , Good B price = 10 Good B = 2 Good A

Good A Price falls to = 2 , Good B price = 10 Good B = 5 Good A

EG : So , as per the effect , consumer tends to replace Good B (expensive) by Good A

(cheap)

This effect is a part of : Price - Demand 'Law of Demand Effect'

= Income Effect + Substition Effect

(former meaning- change in consumption due to change in real income / purchasing

power because of change in price)

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