In economic theory, what is the relationship between price and demand?

In economic theory, the relationship between price and demand is typically expressed through the law of demand, which states that, all else being equal, as the price of a good or service decreases, the quantity demanded by consumers increases. This behavior reflects consumers' inclination to purchase more of a product when it is available at a lower price, viewing it as a more attractive option compared to similarly priced or higher-priced alternatives. Consequently, when prices drop, people are more likely to buy, leading to an increase in overall demand.

The reasoning behind this phenomenon can be attributed to both the substitution effect and the income effect. As prices fall, consumers may substitute the less expensive good for other goods that are now relatively more expensive, thereby increasing demand. Additionally, a decrease in price effectively increases consumers' purchasing power, allowing them to buy more of the good without spending more money.

This understanding of price and demand is crucial for businesses when setting pricing strategies, as they must consider how their pricing decisions could directly impact consumer behavior and, ultimately, their sales volume.