What is the inverse relationship on a demand curve between price and quantity?

Demand:

Demand  (D) is a schedule that shows the various amounts of product consumers are willing and able to buy at each specific price in a series of possible prices during a specified time period.

Quantity demanded  (Qd) is the amount of a good or service that individuals are willing and able to buy at a particular price at a particular time.

In another words, demand is the quantity demanded at all prices during a specific time period. A change in price will change the quantity demanded, not the demand. Any other factors other than price change will change the demand. Non-price factors include income, preferences, expectation, number of buyers, etc.

The law of demand:

Law of demand states: As price of a good increases, the quantity demanded of the good falls, and as the price of a good decreases, the quantity demanded of the good rises, ceteris paribus.

Restated: there is an inverse relationship between price (P) and quantity demanded (Qd).

Explanation of Law of Demand:

1. Substitution Effect: As the price of product A increases, product A is comparatively more expensive than product B if B's price remain constant. Therefore, consumers will substitute B for A, causing the consumption of A to decrease.

2. Income Effect: higher price will lower the consumption power of your income and decrease the quantity demanded.

3. Law of diminishing marginal utility: As a person consumes more of a good, the additional utility of consuming more will eventually decreases. This means that to encourage additional consumption, price must fall.

Demand Curve:

It is the graphical representation of the relationship between the quantity demanded of a good and the price of the good. It is a downward sloping curve.  

 Price (P)                           $2    4      6    8   10

 Quantity demanded (Qd) 40   30   20  10   0

Price and quantity demanded are negatively related.

Individual Demand Vs Market Demand:

Market demand is the summation of all of the individual demand curves for a particular item.  The transaction from an individual to a market demand schedule is accomplished by summing individual quantities at various price levels. Aggregate demand (AD) is not the same as market demand. AD is a schedule that shows the various amount of real domestic output (GDP) which domestic and foreign buyers will desire to purchase at each possible price level. 

The classic microeconomics supply and demand model shows price on the vertical axis and demand on the horizontal axis. In between, them is a downward-slowing demand curve where price and quantity demanded to have an inverse relationship. The general concept is intuitive: as goods become more expensive, people tend to demand less of them.

Key Takeaways

• The law of supply and demand is a keystone of modern economics.
• According to this theory, the price of a good is inversely related to the quantity offered.
• This makes sense for many goods, since the more costly it becomes, less people will be able to afford it and demand will subsequently drop.

Supply & Demand

The law of supply and demand, one of the most basic economic laws, ties into almost all economic principles in some way. In practice, supply and demand pull against each other until the market finds an equilibrium price. For many simple markets, this inverse relationship holds true. If the cost of a shirt doubles, consumers buy fewer shirts, all else being equal. If the shirts go on sale, consumers tend to buy more. However, multiple factors can affect both supply and demand, causing them to increase or decrease in various ways.

There are several practical issues with the simple supply and demand model as depicted in the graph below. In addition to the theoretical existence of goods that actually rise in demand as the price goes up (known as Giffen and Veblen goods), a basic microeconomics chart like this one cannot possibly contain all of the various variables at work that impact supply and demand. Nevertheless, it is typically the case that price and quantity are inversely related: the more costly the same good becomes, they less people will want it - and vice versa.

Deducing the Law of Demand

The law of demand is actually a deductive, logical construct. It holds a few observations as true: resources are scarce, there is a cost to acquiring them, and human beings employ resources to achieve meaningful ends.

Cost does not necessarily mean a dollar amount. Cost simply represents what is given up to acquire something, even if it is time or energy. True cost also implies opportunity costs.

Since human beings act, economists deduce that their actions necessarily reflect value judgments. Every nonreflex action is taken to obtain or increase value in some sense; otherwise, no action takes place. This definition of value is incredibly broad and could be considered a tautology. As the cost of acquiring a good increases, its relative marginal utility decreases compared to other goods. Even if all relative costs increased by exactly the same proportion at the exact same time, consumers' resources are finite.

The Bottom Line

Consumers only enter into a voluntary trade if they believe, or ex-ante, they receive more value in return; otherwise, no trade occurs. When the relative cost of a good increases, the gap between value and cost shrinks. Eventually, it goes away. Thus, the law of demand really states: as a good's true cost increases, consumers demand relatively less of it.

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