The Significant Components of an Economic Model in a Market

Added on -2020-02-18

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RUNNING HEAD: COMMUNICATION SKILLS1Communication skillsComparative analysis of price fall on product demand Submitted by:
Comparative analysis of price fall on product demand2ContentsIntroduction.................................................................................................................................................3Comparative analysis of relevant literature..................................................................................................3Relation in between Price and Demand: Normal Goods..............................................................................4Relation in between Price and Demand: Inferior Goods..............................................................................5Relation in between Price and Demand: Giffen Goods or Giffen Paradox:.................................................6Conclusion...................................................................................................................................................8References...................................................................................................................................................9
Comparative analysis of price fall on product demand3Introduction Supply and demand are two of the significant components of an economic model in a market. ina competitive market, the entity price for a good vary until it reconcile at a point somewhere thequantity demanded will be equal to the quantity supplied by producers(Mapleton,2017). Thiswill result in equilibrium of price and quantity. Any fall in the price directly affects in anincrease in the demand. Majority of case witnesses similar income and substitution effect. Undercertain circumstances the effect may pull in different directions. It moves in a direction ofsubstitution effect is relatively certain. Hence it is obvious that, a fall in the comparative price ofa good constantly causes an enhancement in quantity demanded. It means that, substitution effectconstantly persuade the consumer to purchase goods at a cheaper price (Nicholson and Snyder,2014).Comparative analysis of relevant literatureThe direction of income effect is not certain. It is an accepted fact that a rise in income willincrease the buying power of the customers. In case of inferior goods, an increase in his incomecauses a fall in quantity demanded of those goods. As now he will be using superior goods assubstitution in place of the inferior goods. Consequently the income effect will either be positiveor negative. These goods do have a positive income effect. So, a fall in their price causes anincrease in the purchasing power. The income effect works in a similar direction like thesubstitution effect. Mutually the factors are working towards increasing the quantity demanded.In case of the inferior goods, income effect is negative; it is working in the reverse direction tothe substitution effect (Freeman, Herriges and Kling, 2014).

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