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The law of demand can be explained by observing that an unexpected price change affects the purchasing power of consumers. If the price is lower than expected, income is liberated which allows the consumer to buy more. An unexpected price increase would cause the consumer to buy less.
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When a housewife goes to the supermarket to buy groceries and finds that one of the products she intended to buy, was reduced in price because of a special sale, it makes her feel wealthier. Indeed, she can buy more with the money she started with. This is the income effect. |
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