One major reason for the law of demand is that
one price changing requires at least one other price to change in the opposite direction.
people substitute relatively lower-priced goods for relatively higher-priced goods.
a higher price never reduces quantity demanded by enough to lower total revenue.
people are willing to produce more units at a higher price.
The correct answer and explanation is :
The correct answer is: people substitute relatively lower-priced goods for relatively higher-priced goods.
Explanation:
The Law of Demand is a fundamental principle in economics that states that, all else being equal, an increase in the price of a good will lead to a decrease in the quantity demanded for that good, and conversely, a decrease in the price of a good will lead to an increase in the quantity demanded. One of the main reasons behind this law is substitution effect.
When the price of a good increases, people tend to look for alternatives (substitute goods) that offer similar utility but at a lower price. This substitution effect leads to a decrease in the quantity demanded for the more expensive good. For example, if the price of apples increases significantly, consumers may buy more oranges (a substitute good) instead, assuming oranges provide a similar benefit. On the other hand, if the price of apples decreases, people may shift their purchases from oranges to apples, increasing the quantity demanded of apples.
This concept works through consumer behavior. As prices rise, consumers’ purchasing power effectively decreases, and they may shift their spending toward goods that are relatively cheaper. This behavior underpins the downward-sloping demand curve typically seen in most markets.
To further clarify why the other options are incorrect:
- “One price changing requires at least one other price to change in the opposite direction” is not a key explanation for the law of demand. Price changes in a specific good may occur without requiring changes in other prices.
- “A higher price never reduces quantity demanded by enough to lower total revenue” is not true in general. If the price increases significantly, the quantity demanded may drop so much that total revenue falls. This is known as the price elasticity of demand.
- “People are willing to produce more units at a higher price” pertains more to supply behavior and does not directly explain the law of demand, which is concerned with the relationship between price and quantity demanded.