Question

Which of the following contributes to the inverse relationship between price and quantity demanded that is illustrated by a downward sloping demand curve for a normal good?

a) Tastes and preferences
b) Marginal effect
c) Income effect
d) Resource costs
e) Substitution effect

Answer 1

The downward sloping demand curve for a normal good is explained by the substitution effect, where consumers buy more of a cheaper product, and the income effect, where lower prices increase consumers' purchasing power.

Step-by-step explanation:

The inverse relationship between price and quantity demanded, illustrated by a downward sloping demand curve for a normal good, is largely due to the substitution effect and the income effect.

The substitution effect occurs when a product becomes cheaper relative to other products; consumers will tend to buy more of this product and less of others. The income effect happens after a price decline, allowing the consumer to purchase the same amount of goods as before with money left over, thus potentially purchasing more of the reduced-price product.