Question

In the case of inferior goods, the law of demand fails only when negative income effect is greater than substitution effect. explain this statement clearly.

Answer 1

Answer:

In case of inferior good, the substitution effect is negative, i.e., with fall in price of inferior good, its demand increases. But, income effect of inferior good is positive, i.e., with fall in price of inferior good, the purchasing power increases which leads to fall in its demand. So the law of demand will fail only if negative income effect is greater than substitution effect.