Question

why does the change in the price of a good will always have an impact on quantity demand of that good ,rather than on the quantity demand of other goods? explain thx

Answer 1

The change in the price of a good will always have an impact on the quantity demanded of that good because of the inverse relationship between price and quantity demanded as is better explained by the Law of Demand which states that as the price of any good decreases , the quantity demanded of it increases and vice-versa. Moreover, the price of a good is having direct relationship with the quantity demanded of other goods that is called as Substitution effect. This could be better explained with the help of an example. Suppose if the market price of wheat increases two things happen :

Firstly , the increased price of wheat reduces the real income of everyone who was consuming wheat in past , in proportion to the share of their income they were initially spending on wheat. This is called as Income Effect.

Secondly, some people who were consuming wheat in the past respond to the fact that wheat has become more expensive as compared to other things such as rice , barley , maize etc. and hence they will buy these things. This is called as Substitution Effect.

Depending on the nature of the market demand for wheat , Income Effect may cause them to consume less wheat and the Substitution Effect may cause them to consume more of other substitute goods.If only Income effect is took into consideration , the increase in the price leads to the decrease in the quantity demanded of wheat and vice-versa, keeping other things constant. Thus we can say that the change in price of wheat is having negative impact on the quantity demanded of wheat rather than on the quantity demanded of other goods.

Thus it is clear from the above example that the change in the price of a good is always having an impact on the quantity demanded of that good rather than on the quantity demanded of other goods.