Wednesday, November 14, 2012

As price increases what happens to quantity people are willing to buy?

As price increases, the amount of a good or service that people are willing to buy decreases.  In other words, the price and the amount that people are willing to buy (which we call quantity demanded) vary inversely.  This is the law of demand.


If you think about it, you will see that this is logical.  Imagine that you were thinking about buying a new smartphone. Imagine that the phone costs $400.  Wouldn’t you be more likely to buy it than you would be if it cost $500 or $600?  Some people will be just as likely to buy it at the higher price as they are at the lower.  For example, imagine you make $10 million per year.  In that case, the extra $100 or $200 would not matter to you.  However, if we are looking at the quantity that all people total are willing to buy, it will certainly go down because there are many people for whom the extra $100 or $200 would actually matter.


The law of demand, then, tells us that when the price of a good or service goes up, the amount of it that people are willing to buy will go down.

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