Question

The law of demand states that the quantity demanded of a good changes, other things being equal, when a. the price of the good changes. b. consumer income changes. c. the prices of other goods change. d. a change occurs in the quantities of other goods purchased.

Short answer

The law of demand is best described by option a: the price of the good changes. It states that the quantity demanded of a good changes when the price of the good changes, keeping other factors constant.

Step-by-step solution

Option Analysis

Let's consider each option: a. the price of the good changes: The law of demand shows the relationship between the price of a good and the quantity demanded, assuming that all other factors are held constant. If the price of the good increases, the quantity demanded decreases, and vice versa. This option fits well with the definition of the law of demand. b. consumer income changes: While consumer income can affect the demand for the good, it is not the primary focus of the law of demand as it assumes all other factors are held constant. So this option doesn't fit the definition. c. the prices of other goods change: The prices of other goods can have an impact on the demand for a particular good through substitution or complementary effects, but these factors are not the primary focus of the law of demand. Therefore, this option doesn't fit the definition. d. a change occurs in the quantities of other goods purchased: This option considers the changes in the quantities of other goods purchased, which may have an effect on the demand for the good in question, but it is not the primary focus of the law of demand as it assumes all other factors are held constant. So this option doesn't fit the definition.

Conclusion

Based on our analysis, the best answer that describes the law of demand is: a. the price of the good changes. This option focuses on the relationship between the price of a good and the quantity demanded, which is the key aspect of the law of demand. It states that the quantity demanded of a good changes when the price of the good changes, keeping other factors constant.

Key concepts

quantity demanded

Quantity demanded refers to the specific amount of a good that consumers are willing and able to purchase at a given price during a certain period. It is essential to remember that quantity demanded is not static; it can vary based on several factors, including changes in price.
Changes in the quantity demanded are often illustrated through a demand curve on a graph, which typically slopes downward. This slope demonstrates that as the price of a good decreases, the quantity demanded increases, highlighting the inverse relationship between price and quantity demanded specific to the law of demand.
The demand curve and quantity demanded are crucial in economic studies as they help predict consumer behavior in response to different price levels. This information is vital for businesses setting prices and governments setting economic policies.

price of the good

The price of a good is an essential factor in determining the quantity demanded according to the law of demand. An increase or decrease in the price leads directly to a decrease or increase in the quantity demanded, respectively.
When the price of a good goes up, consumers may no longer be willing or able to buy the same quantity as they did before. Conversely, if the price goes down, more consumers will find it affordable, leading to an increase in the quantity demanded.

• An important point to note is that these changes are assuming that all other factors remain constant, which is a core condition of the law of demand.
• Also, this price mechanism functions within the context of the consumer’s budget limitation, impacting their purchasing decisions.

Understanding the influence of the price of the good on consumer demand helps businesses make informed pricing strategies.

consumer income

Consumer income is a critical factor influencing purchasing power, though it is not the focal point of the law of demand. It affects the demand for goods, but rather than shifting along a demand curve as with price changes, it results in a shift of the entire demand curve.
Higher consumer income generally increases the demand for goods, as people have more money to spend. This means the demand curve shifts to the right. In contrast, a fall in income typically leads to a decrease in demand, shifting the demand curve to the left.
It’s important to distinguish this shift from movements along the demand curve. While changes in consumer income shift the curve, price changes cause movement along the existing curve.
Understanding these distinctions is important to comprehending how broader economic conditions affect market demand.

substitution effect

The substitution effect refers to the change in the quantity demanded of a good due to a change in its price, making the good more or less attractive compared to other goods.
When the price of a good falls, it becomes cheaper relative to substitutes—other goods that can replace it—causing the quantity demanded for the cheaper good to increase. Conversely, if the price rises, the good may become less attractive, pushing consumers to choose the substitute goods instead.
This effect operates under the assumption that consumers strive to maximize their satisfaction or utility given their budget constraints. As a core concept, it helps explain part of the reason why demand curves typically have a downward slope, alongside the income effect.
Understanding the substitution effect is vital in markets, particularly where competing products offer similar benefits or uses, such as butter and margarine.