Why might an increase in income lead to a decrease in demand?
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Asked in Economics
Why might an increase in income result in a decrease in demand?
The Giffen's paradox explains this theory very well .When a person's income rises his purchasing power obviously rises.This leads him to substitute his earlier consumption commodities (inferior goods in the theory) to something more superior. In this case when the income rises the demand for inferior goods falls. But this also proves that when income rises the demand for superior goods also rises
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What does demand depend upon?
Before this question can be answered, one must first make the distinction between demand and quantity demanded. Quantity demanded is determined by price: if the price is high, people will not not demand very much of the good, but if the price is low, people will demand more of the good. Demand, on the other hand, is a shift in quantity demanded at all prices. A change in demand is determined by five factors. The first factor is change in income: if income increases, then demand for a particular good, like cars, will go up. If income goes down, then not as many people will be able to afford to buy cars, so demand will go down. The second factor is expectations: if people expect the price of a good to go up tomorrow, then people will demand more of the good today. The third factor is the prices of related goods (substitutes and complements): if the price of hot dogs goes up, demand for hamburgers (a substitute) might increase. If the price of hot dogs goes up, demand for hot dog buns (a complement) might decrease. The fourth factor is number of buyers in the market: if you only have two buyers in the market for ice cream, for example, then demand would be low. However, if you add ten more buyers to the market, then demand would increase at every price because there would be more people demanding ice cream. The fifth factor is probably the most obvious: tastes and preferences. If people don't like pizza, then demand for pizza will be low.
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Since corn and wheat can both be used as types or grain, they are in a way interchangeable amongst buyers. These types of goods are called substitute good, one can be substituted for another. If the price of corn rises, that leaves wheat being the more favored product (because it's cheaper). When an increase for the demand for wheat increase, the supply will decrease. The opposite would happen if the price of corn falls. If it falls under the price of wheat, corn will then be more favored. Thus making it the more demanded product. Under the law of demand, supply and demand work in opposite directions. When the demand increases, the supply decreases. When the demand decrease, the supply increases.
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How might a reduction in taxation help government aims?
Economic growth : Fall in tax increases the disposable income of the people therefore increasing their purchasing power leading to increased GDP Employment :decrease in tax causes firms to produce more also due to increased demand which increases the demand for labour.eradicating the problem of employment distribution of income : this increases money for the poor but increases burden on the rich hope it helped !
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