why do household buy more of a commodity at a lower price?

Dear Shivangi,

Households buy more of a commodity at a lower price due to the working of the following factors:

1. Law of diminishing marginal utility: As marginal utility derived from every additional unit of a good consumed tends to decline at the same price. Consequently, for each additional unit of the good, the consumer is willing to pay a lesser price. Thus, the consumer will increase his demand only when the price falls.

2. Several uses of a commodity: A commodity can be used for different purposes. For example, wheat flour can be used for making chapatis, biscuits, bread, etc. With the fall in the price, the good will be put to various uses and consequently the demand will rise.

3. Substitution effect:  It implies that with fall in the price of a good makes its substitute goods relatively expensive. For example a fall in the price of pepsi would make coca-cola relatively expensive. Thus, the consumers who were having coca-cola will shift their demand towards pepsi and thereby demand for coca-cola reduces and for pepsi increases.  

4.Income effect: It implies that a fall in the price of a good leads to the rise in the purchasing power of the money income of the consumer and consequently leads to the increase in the demand for good. This is because more of good can be purchased with the same amount of money. 

 

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