The claim that, with other things being equal, the quantity demanded of a good falls when the price of that good rises is known as the Law of Demand. This fundamental economic principle states that there is an inverse relationship between the price of a good and the quantity demanded by consumers. Essentially, as the price of a good increases, consumers tend to buy less of it, and as the price decreases, consumers tend to buy more, assuming all other factors remain constant (ceteris paribus).
Explanation of the Law of Demand
- The law of demand is based on the concept of diminishing marginal utility, where consumers derive less additional satisfaction from consuming each extra unit of a good as they consume more of it. This makes them willing to pay less for additional units when the price is higher.
- The law also incorporates the substitution effect, where consumers switch to cheaper alternatives when the price of a good rises.
- The income effect plays a role as well, as a rise in price effectively reduces consumers' real income, leading to reduced purchasing power and lower quantity demanded.
Demand Curve Representation
- This relationship is graphically represented by a downward-sloping demand curve, indicating the negative correlation between price and quantity demanded.
- The law holds true under the condition that other determinants of demand, such as consumer income, tastes, and the prices of related goods, remain unchanged.
Exceptions
- While the law usually holds, there are notable exceptions such as Giffen goods and Veblen goods, where higher prices may lead to higher quantity demanded under specific circumstances.
In summary, the claim describes the Law of Demand, which is a cornerstone of microeconomics describing how price inversely affects quantity demanded, all else being equal.
