Although your notes provide a clear and concise representation for the law of demand, I would like to add why there is an inverse relationship between price and quantity. There are three explanations for this inverse relationship. 1. Common Sense: people buy in more quantity when the price is less 2. Diminishing Marginal Utility: as a person utilizes more good, their need to consume more is less satisfying. In order to allow a person to continue consumption, the price of the good must be decreased. 3. Income Effect: the lower price of goods increases the consumption power of a buyer's income (allowing the buyer to purchase more than before); Substitution Effect: buyer's substitute price A for price B (because price B is lower) and as they do that, they are decreasing the consumption of price A
Although your notes provide a clear and concise representation for the law of demand, I would like to add why there is an inverse relationship between price and quantity.
ReplyDeleteThere are three explanations for this inverse relationship.
1. Common Sense: people buy in more quantity when the price is less
2. Diminishing Marginal Utility: as a person utilizes more good, their need to consume more is less satisfying. In order to allow a person to continue consumption, the price of the good must be decreased.
3. Income Effect: the lower price of goods increases the consumption power of a buyer's income (allowing the buyer to purchase more than before); Substitution Effect: buyer's substitute price A for price B (because price B is lower) and as they do that, they are decreasing the consumption of price A