The income effect and the substitution effect help explain the law of:
A) demand.
B) supply.
C) opportunity cost.
D) competitive markets.

Question

Quizplus · Accepted Answer

The income effect and the substitution effect are concepts used to explain consumer behavior in response to price changes, which directly relate to the law of demand. The law of demand states that, all else being equal, as the price of a good decreases, the quantity demanded of that good increases, and vice versa. The income effect explains how changes in the price of goods affect consumers' purchasing power, while the substitution effect explains how consumers will substitute a good for another if its price changes, both contributing to the understanding of demand.

The Income Effect and the Substitution Effect Help Explain the Law