Suppose the price of a BMW falls. Explain the law of demand based on the income and substitution effects.

According to the law of demand, the higher the price, the lower the quantity demanded and the lower the price, the higher the quantity demanded.

It is expected that when the price of a BMW falls, the quantity of cars demanded increases.

there are two effect in place that affect the demand for BMW.

They are :

The substitution effect looks at the change in price of a good relative to other goods. When the price of a BMW falls, it becomes cheaper relative to other goods. As a result, consumers buy more of BMWs and less of other goods. This leads to a movement down along the demand curve for that good.

The income effect looks at how a change in price affects real disposable income. When the price the BMW decreases, real disposable income increases. As a result, consumers can afford to buy more BMW cars as the consumers purchasing power has increased, holding money income constant.

These two effects lead to an increase in the quantity of BMW demanded

Explanation: