How will you explain the law of demand with the help of substitution effect of a change in price of a commodity?
Answers
In Microeconomics,the price substitution effect can practically translate into law of demand through changes in the relative prices of various goods and services.
Explanation:
Law of demand basically advocates the inverse or indirect relationship the price of any normal good or service and its quantity demanded by the consumers or buyer,implying that the quantity demanded of any normal good or service will decrease as its price rises and vise versa.Now,substitution effect refers to the change in the relative price of one good or commodity with respect to the price of any other god or commodity.Suppose,a rational consumer or buyer only purchases two goods:apples and oranges.Now if per unit price of apple increases,the relative price of orange compared to apple will decrease,assuming there is no change per unit price of orange.Therefore,apple has become more expensive compared to orange due to change in their relative prices or price substitution effect.This would lead to a higher demand for orange as it has become cheaper compared to apple.Hence,a lower relative price of orange will increase the demand for oranges which to some extent translate to the law of demand.Therefore,price substitution effect can implicitly lead to law of demand through changes in consumer behavior due to changes in relative price of goods and commodities.