Question

What does a downward-sloping demand curve mean about how buyers in a market will react to a higher price?

Short answer

A downward-sloping demand curve represents the law of demand, which states that as the price of a good or service increases, the quantity demanded decreases. When prices are higher, buyers in the market react by purchasing less of the good or service because the additional cost leads them to reduce their consumption or seek out substitutes. This change in buyer behavior may lead to a new market equilibrium, with an excess supply situation where suppliers may need to reduce prices to clear excess inventory and reach a new equilibrium point.

Step-by-step solution

Understand the concept of demand curve

A demand curve is a graphical representation that shows the relationship between the quantity demanded of a good or service and its price. A downward-sloping demand curve represents the law of demand, which states that as the price of a good or service increases, the quantity demanded decreases, and vice versa.

Analyze the effect of a price change on the demand curve

A downward-sloping demand curve implies that when the price of a good or service increases, the quantity demanded will decrease as consumers find the higher-priced good less attractive and may switch to alternative goods or reduce their consumption altogether.

Explain buyer behavior when prices are higher

When prices are higher, buyers in the market react by purchasing less of the good or service. This is because, with a downward-sloping demand curve, the additional cost of the good leads consumers to reassess their purchasing decisions and either reduce the quantity of the good they consume or seek out substitutes.

Understand the impact of the price increase on market equilibrium

The change in buyer behavior due to an increase in price may lead to a new market equilibrium. The quantity of the good demanded will fall, and this could cause an excess supply situation where the quantity supplied exceeds the quantity demanded. Eventually, suppliers may need to reduce their prices to clear the excess inventory and reach a new equilibrium point.