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An ''Expansion'' of Demand - 8 |
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One reason consumers buy more of a commodity when its price is lower
is because you can increase your total utility or the amount of ''satisfaction''
you can gain from your income.
If you have a fixed income and you like tomatoes, if the price of tomatoes falls, then you can buy more of them. This is called an income effect. Lower prices mean you have more purchasing power; effectively, your real income has effectively risen, because your income can buy more tomatoes. |
When tomatoes are $5 per kilogram, the average household buys one kilogram per month (see point E). When the price falls to $4 per kilogram, economists say there has been an expansion of demand (from point E to point E1) and 2 kilograms are purchased per month.
A further fall in price to $3 per kilogram sees a further ''expansion of demand'' to the point from E1 to E2, at which point households consume three kilograms of tomatoes per month.
Another reason consumers buy more of a commodity when its price is lower is because the price of alternatives has become effectively more expensive. If the price of beef falls, and the price of lamb does not, then lamb has become effectively dearer. Consumers substitute beef for lamb for their Sunday dinner. This is called the substitution effect.