The relationship between the quantity demanded and the price of a good is described by the law of demand, which states that, all else being equal, as the price of a good decreases, the quantity demanded of that good increases, and vice versa. There are several reasons why this inverse relationship exists:
- Income Effect: When the price of a good decreases, consumers' purchasing power increases. They can now buy the same quantity of goods while spending less money. This increase in purchasing power allows consumers to afford more of the good, leading to a higher quantity demanded.
- Substitution Effect: As the price of a good decreases, it becomes relatively cheaper compared to other goods. Consumers may choose to substitute other, more expensive goods with the now relatively cheaper good. This substitution effect leads to an increase in the quantity demanded of the cheaper good.
- Diminishing Marginal Utility: The concept of diminishing marginal utility suggests that as individuals consume more units of a good, the additional satisfaction or utility derived from each additional unit decreases. Therefore, at lower prices, consumers are willing to consume more units of a good because the marginal utility gained from the additional units exceeds the marginal cost (price) of those units.
- Market Expansion: Lower prices can attract new consumers to the market who were previously unwilling or unable to purchase the good at higher prices. This expansion of the consumer base further contributes to an increase in the quantity demanded.
Overall, these factors combine to create the inverse relationship between the price of a good and the quantity demanded. When the price is lower, consumers are incentivized to purchase more due to increased purchasing power, relative affordability, diminishing marginal utility, and expanded market access.