Economists refer to the relationship that a higher price leads to a lower quantity demanded as the
a- income gap
b- market equilibrium
c- law of demand
d- price model
The correct answer to the above scenario is option C which states “Law of demand”
In economics majority of the terminology and concepts, revolve around Law of demand, hence it is extremely important to understand the concept of law of demand in detail.
Law of demand: In the most lay man terms, in every demand there are two main categories, the fist one is the price and the second one is the demand. In case of law of demand the price and quantity are inversely related to each other. Let us understand this concept with an example, which will make things crystal clear:
For instance, the price of pizza is $20 presently, and the customer has an average of two pizza’s in a week and spends $40. However,
– Case 1: If the price of the pizza deceases, and comes out to be $15, the customer will increase his demand and have 3 pizza’s in a week instead of 2. Now the customer will end up spending $45. This is a win win situation for both the customer as well as the seller. The customer gets to eat one more pizza by paying just a little extra and the seller receives a profit of $5.
– Case 2: If the price of the pizza increases, and comes out to be $30, the customer will decrease his demand and have just 1 pizza in a week instead of 2. Now the customer will end up spending $30. This is a loss situation for both the customer as well as the seller. The customer gets to eat just one pizza and the seller is at a loss of $10.
The graph of law of demand will be made in such a manner that price and quantity are inversely related to each other.