Quantity demanded changes when price changes because consumers respond to incentives. When prices fall, people are more willing and able to buy a good; when prices rise, they buy less. This relationship, known as the law of demand, is one of the most central ideas in economics. It explains how buyers behave, how markets adjust, and how prices guide resource allocation.
One main reason quantity demanded changes is the substitution effect. When the price of a good falls, it becomes cheaper relative to other products. Consumers may switch from alternatives to the now-cheaper option. For example, if the price of oranges falls while apples remain the same, people tend to buy more oranges because they offer better value.
Another reason is the income effect. A fall in price effectively increases a consumer’s purchasing power. Even though income has not changed, the consumer feels “richer” because they can buy more with the same amount of money. As a result, demand for the good increases. Conversely, if prices rise, purchasing power falls, leading to a decrease in quantity demanded.
Consumer preferences and psychological incentives also matter. Lower prices can encourage impulse purchases or make consumers feel they are getting a bargain. Higher prices, however, may discourage buying or lead consumers to search for alternatives.
Price changes also influence demand through diminishing marginal utility. As people consume more of a good, each additional unit brings less satisfaction. Consumers are only willing to buy additional units if the price drops enough to justify the reduced benefit they get. This helps explain why demand curves slope downward.
Market dynamics further amplify these effects. When the price rises, some consumers drop out of the market entirely, reducing quantity demanded. When prices fall, new consumers enter the market because they can now afford the good.
Finally, price changes help allocate scarce resources. When demand rises with lower prices, firms adjust production. When demand falls due to higher prices, firms may shift resources elsewhere. These changes help markets reach equilibrium.
In summary, quantity demanded changes when price changes because of substitution, income effects, diminishing marginal utility, buyer psychology, and market adjustments.
FAQ
1. Why do consumers buy more when prices fall?
Because the good becomes cheaper relative to alternatives, purchasing power increases, and the lower price makes additional units more worthwhile.
2. Do all goods follow the law of demand?
Most do, but rare exceptions exist—such as Giffen or Veblen goods—where higher prices may increase demand due to status or necessity effects.
3. Why is the law of demand important in real markets?
It helps businesses set prices, allows governments to predict tax impacts, and explains how market equilibrium forms.
Call to Action
Want microeconomics explained in clear, simple steps? Explore RevisionDojo’s full guides to build confidence and master demand and supply concepts.
