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    Question

    When the price of a good falls, the quantity demanded

    generally rises. Which of the following BEST explains this inverse relationship according to the Law of Demand?
    A Increase in the cost of production Correct Answer Incorrect Answer
    B Increase in consumer incomes Correct Answer Incorrect Answer
    C Substitution effect and income effect Correct Answer Incorrect Answer
    D Government imposing price controls Correct Answer Incorrect Answer
    E Rise in the price of complementary goods Correct Answer Incorrect Answer

    Solution

    The Law of Demand works primarily because when the price of a good decreases: тАв Substitution effect: Consumers switch from relatively expensive goods to the cheaper one. тАв Income effect: The lower price increases real purchasing power, allowing consumers to buy more. These two effects together explain why demand increases when price falls.

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