What does the Law of Demand state?

Question

BlackTom AI · Accepted Answer

The Law of Demand states that, ceteris paribus, when the price of a good decreases, the quantity demanded increases (and vice versa).

1. Relevant knowledge points and concepts
- Demand vs. quantity demanded: "Quantity demanded" is an amount consumers buy at a particular price; "demand" is the whole relationship between prices and quantities (demand curve). The Law of Demand refers to the inverse relationship between price and quantity demanded, holding other factors constant (ceteris paribus).
- Downward-sloping demand curve: Graphically, demand slopes down from left to right, reflecting that lower prices induce higher quantities demanded.
- Income and substitution effects: A price drop increases consumers’ real purchasing power (income effect) and makes the good relatively cheaper than alternatives (substitution effect), both tending to raise quantity demanded.

2. Step-by-step reasoning
- Start with a given price P1 and quantity Q1 demanded.
- If price falls to P2 < P1 and all else is unchanged, two effects operate: consumers can afford more (income effect) and may switch from substitutes (substitution effect).
- These effects increase quantity demanded from Q1 to Q2 > Q1. This is a movement along the demand curve, not a shift of the demand curve.

3. Example (intermediate steps)
- Suppose at P = $5, Q = 10 units. If price falls to $3, consumers buy Q = 15 units. Price: $5 → $3; Quantity: 10 → 15. This numerical change illustrates the inverse relationship.

4. Why the correct answer is correct
- Option 2 matches the Law of Demand’s inverse relationship: lower price → higher quantity demanded (ceteris paribus). It captures the core economic intuition and graphical representation.

5. Why other options are incorrect
- Option 1 states the exact opposite (lower price → lower demand) and contradicts the law.
- Option 3 claims a positive relationship (higher price → higher demand), which is generally false except for rare Giffen/Veblen exceptions and is not the Law of Demand.
- Option 4 denies any relationship, contradicting abundant empirical and theoretical evidence.

6. Conclusion
- Therefore, the correct choice is option 2: "As the price of a good decreases, the demand for it increases," which matches the provided answer.

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