In 2012, a United States household of four (two children) was considered poor if its income was below approximately $23,000 (this does not include income from anti-poverty programs) (http://www.census.gov/hhes/www/poverty/data/threshld/index.html).
|Section 1: The Law of Demand|
|Macroeconomics - Unit 2|
Price and Quantity Changes
The answer is no. The law of demand assumes that no other changes take place, so we assume that the price of oranges stays the same. If we had not changed anything else (ceteris paribus), then we would have noticed an increase in the quantity purchased of apples as a result of a decrease in its price, and this conforms to the law of demand.
Substitution and Income Effects
There are two primary reasons why people purchase more of a product as its price decreases. One is the "substitution effect." The substitution effect states that as the price of a product decreases, it becomes cheaper than competing products (assuming that prices of the other products don't decrease). Consumers will substitute the cheaper product for the more expensive product, and vice versa. For example, if the price of apple juice decreases, then "ceteris paribus," more people will purchase apple juice.
The other effect is the "income effect." The income effect states that as the price of a product decreases, buyers will have more income available to purchase more products, and vice versa. For example, if someone purchases 4 DVDs per week at $15 each, this buyer's total expenditure on DVDs is $60. If the price of the DVD falls to $10, the total expenditure for 4 DVDs now equals $40. This means that this buyer now has $20 more income compared to when the price of the DVD was $15. In essence, this buyer's real income has increased. This allows the buyer to purchase more DVDs (law of demand).
|Last Updated on Monday, 24 December 2012 10:50|