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The downward-sloping demand curve is partially explained by which of the following? A
The downward-sloping demand curve is partially explained by which of the following?
A. Substitution effects and income effects
B. The law of increasing marginal costs
C. The principle of comparative advantage
D. The law of diminishing marginal returns to production
E. The least-cost principle
Expert Solution
Let us consider a case of normal good and price increase.
If the price of a good falls, the substitution effect induces the consumer to buy less of the expensive good and more of the cheaper good. Similarly, the income effect induces the consumer to buy less of the good for which price has increased as the real income of the consumer falls. Both the effects work in the same direction leading to a fall in demand for the good for which price has increased, giving a downward sloping demand curve in quantity and price plane.
Hence, the correct option is (A) Substitution effects and income effects
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