3.1 The Law of Demand
Notes
Demand is the willingness and ability to buy a good at each possible price. Wanting something is not enough; a buyer must also be able to pay.
- Law of demand: when the price of a good rises, the quantity demanded falls, and when the price falls, the quantity demanded rises, ceteris paribus.
- Substitution effect: when a good's price rises, consumers switch to cheaper substitutes.
- Income effect: when a good's price rises, buyers' incomes buy less, so they cut back. (A price fall works like a small raise.)
- Diminishing marginal utility: each additional unit of a good gives less extra satisfaction (utility) than the one before, so people buy more only at a lower price. The third slice of pizza is usually less satisfying than the first.
Practice
When the price of beef rises, many shoppers buy more chicken instead. This is the:
Consumers replace the pricier good with a substitute.
A student would love a $1,200 laptop but has only $300. Economists would say she:
Demand requires both willingness and ability to pay.
Why does a thirsty runner value the first bottle of water more than the fourth?
Each extra bottle adds less satisfaction than the one before.
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