2.1.2 (HL)—Assumptions behind demand

At HL, three mechanisms support the law of demand. A price rise reduces real purchasing power (income effect), makes substitutes relatively cheaper (substitution effect), and confronts consumers with declining extra satisfaction from successive units (diminishing marginal utility).

For a normal good, a lower price increases real income and tends to increase quantity demanded. It also encourages substitution toward this now relatively cheaper good. Because marginal utility falls as consumption rises, extra units are normally chosen only at lower prices.

For a price change, explain the income and substitution channels separately, then connect marginal utility to consumers' willingness to pay for additional units.

When train fares fall, commuters may switch from buses because trains are relatively cheaper, and the same budget buys more travel. Additional trips provide less marginal benefit, so the consumer accepts them at the lower fare.

Ceteris paribus is assumed, but it is not itself the HL mechanism. Do not confuse the income effect of a price change with a separate shift caused by an actual change in income.