Economics Supply And Demand Questions Medium
Changes in price have a direct impact on the quantity demanded, following the law of demand. According to this economic principle, as the price of a good or service increases, the quantity demanded by consumers decreases, and vice versa. This inverse relationship between price and quantity demanded can be explained by two main factors: the income effect and the substitution effect.
The income effect refers to the change in purchasing power that consumers experience when the price of a good or service changes. When the price of a product increases, consumers' real income decreases, as they need to allocate a larger portion of their budget to purchase the same quantity of the good. As a result, consumers tend to reduce their demand for that particular good, leading to a decrease in the quantity demanded.
The substitution effect, on the other hand, relates to the consumer's ability to switch to alternative goods or services when the price of a specific item changes. When the price of a good increases, consumers may find it more expensive compared to other similar products. In response, they may choose to substitute the higher-priced good with a cheaper alternative. This substitution behavior leads to a decrease in the quantity demanded of the higher-priced good.
Overall, changes in price directly influence the quantity demanded through the income effect and the substitution effect. As the price increases, consumers' purchasing power decreases, and they tend to substitute the higher-priced good with cheaper alternatives. Consequently, the quantity demanded decreases. Conversely, when the price decreases, consumers' purchasing power increases, and they may be more willing to purchase larger quantities of the good, resulting in an increase in the quantity demanded.