DEMAND:

2.1 Relationship between Price and Quantity Demanded

The demand for a good is the quantity of the good that consumers are willing and able
to buy at each price over a period of time, ceteris paribus. The quantity demanded of a good
refers to the quantity of the good that consumers are willing and able to buy. The law of
demand states that there is an inverse relationship between price and quantity demanded.
When the price of a good falls, the quantity demanded will rise. Conversely, when the price
of a good rises, the quantity demanded will fall. The demand curve of a good shows the
quantity demanded of the good at each price over a period of time, ceteris paribus. The
demand curve is downward sloping due to the law of demand.
The law of demand can be explained with the concept of diminishing marginal utility.
Utility refers to the satisfaction obtained by consumers from consuming a good. Marginal
utility is the additional satisfaction resulting from consuming one more unit of a good. The
more a consumer has of a good, the less they will value it at the margin and this is known as
diminishing marginal utility. Due to diminishing marginal utility, consumers will only
increase the consumption of a good if the price falls. The law of demand can also be
explained with the concepts of substitution effect and income effect. When the price of a
good falls, the real income of consumers will rise as they will be able to buy a larger amount
of goods and services with the same amount of nominal income. This will induce them to buy
more of the good. This effect is known as the income effect of a price fall. Furthermore, when
the price of a good falls, the good will become relatively cheaper than other goods. This will
induce consumers to substitute the good for other goods. This effect is known as the
substitution effect of a price fall.
*Note: Ceteris paribus is Latin which means other things being equal.