Unformatted text preview: have for goods and services. How many times
have you thought that you would like something “if
only you could afford it” or “if it weren’t so expensive”? Scarcity guarantees that many—perhaps
most—of our wants will never be satisfied. Demand
reflects a decision about which wants to satisfy.
The quantity demanded of a good or service is the
amount that consumers plan to buy during a given
time period at a particular price. The quantity
demanded is not necessarily the same as the quantity
actually bought. Sometimes the quantity demanded
exceeds the amount of goods available, so the quantity bought is less than the quantity demanded.
The quantity demanded is measured as an amount
per unit of time. For example, suppose that you buy
one cup of coffee a day. The quantity of coffee that
you demand can be expressed as 1 cup per day, 7
cups per week, or 365 cups per year.
Many factors influence buying plans, and one of
them is the price. We look first at the relationship
between the quantity demanded of a good and its
price. To study this relationship, we keep all other
influences on buying plans the same and we ask:
How, other things remaining the same, does the
quantity demanded of a good change as its price
The law of demand provides the answer. The Law of Demand
The law of demand states
Other things remaining the same, the higher the
price of a good, the smaller is the quantity
demanded; and the lower the price of a good, the
greater is the quantity demanded. Why does a higher price reduce the quantity
demanded? For two reasons:
■ Substitution effect
Income effect 55 Substitution Effect When the price of a good rises, other things remaining the same, its relative price—
its opportunity cost—rises. Although each good is
unique, it has substitutes—other goods that can be
used in its place. As the opportunity cost of a good
rises, the incentive to economize on its use and
switch to a substitute becomes stronger.
Income Effect When a price rises, other thin...
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