Therefore a decline in their real income makes goods and services relatively expensive.
In economics demand is influenced by a number of factors and this include price, price of substitutes and income. For a normal good as the price of this good increases then the demand for this product declines, assuming that all the goods in an economy are normal goods and that cosmetics are substitutes to highly luxurious goods then it is evident that a decline in the income of consumers will result into a relative increase in the price of the luxurious goods which will be substituted with less expensive cosmetics. This is referred to as the substitution effect, the following diagram shows the effect of an increase in price on the demand.
Consumers want to maximize their utility, in order to maximize utility consumers want to increase the total units of goods consumed, however the total units of goods and services purchased is determined by the budget line and the indifference curve, for this reason therefore the decline in income results into a decline in the real income and therefore consumers will only purchase a few units of goods, in order to maximize utility the consumer will opt to purchase ...Show more