Enlighten whether the effects are income or substitution when the cost of living increases and when there is a reduction in the purchasing power of your income. Concept Introduction: Income effect: This is described as the change in the quantity of goods and services due to a change in the income of the people. Substitution effect: This is an economic theory in which when the price rises or income of the people falls, people will substitute the dearer goods with less expensive alternative goods.

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Respond to this post. Hello Professor, A rise in consumption in the economy would cause an increase in aggregate demand. Therefore, when consumers spend money on everyday goods and services, it not only helps to stimulate economic growth, but it could also present potential issues like unsustainable debt levels or inflation. I believe that it would be beneficial to consider such factors and adopt a purchasing strategy to help navigate the challenges posed by inflation or unsustainable debt levels. First, do you think our business will be affected because inflation is rising? How? Yes, I do believe that the business will be affected because of inflationary pressures. Inflation rising will affect the cost of goods, services, and labor, which could lead to higher operating expenses. The potential reduction of profit margin because of inflation could lead to a smaller percentage of revenue being retained as profit. Therefore, inflation rising will force us to raise prices for…

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Chapter 12, Problem 2P

To determine

Enlighten whether the effects are income or substitution when the cost of living increases and when there is a reduction in the purchasing power of your income.

Concept Introduction:

Income effect:

This is described as the change in the quantity of goods and services due to a change in the income of the people.

Substitution effect:

This is an economic theory in which when the price rises or income of the people falls, people will substitute the dearer goods with less expensive alternative goods.

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Respond to this post. Hello Professor, A rise in consumption in the economy would cause an increase in aggregate demand. Therefore, when consumers spend money on everyday goods and services, it not only helps to stimulate economic growth, but it could also present potential issues like unsustainable debt levels or inflation. I believe that it would be beneficial to consider such factors and adopt a purchasing strategy to help navigate the challenges posed by inflation or unsustainable debt levels. First, do you think our business will be affected because inflation is rising? How? Yes, I do believe that the business will be affected because of inflationary pressures. Inflation rising will affect the cost of goods, services, and labor, which could lead to higher operating expenses. The potential reduction of profit margin because of inflation could lead to a smaller percentage of revenue being retained as profit. Therefore, inflation rising will force us to raise prices for…

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