At higher prices, the quantity demanded is less than at lower prices. A demand schedule indicates that, typically, there is an inverse relationship between the price of a product and the quantity demanded. This relationship is easiest to see when a graph is plotted, as shown. Demand curves generally have a negative gradient indicating the inverse relationship between quantity demanded and price. There are at least three accepted explanations of why demand curves slope downwards: The law of diminishing marginal utility, The income effect and The substitution effect.
One of the earliest explanations of the inverse relationship between price and quantity demanded is the law of diminishing marginal utility. This law suggests that as more of a product is consumed the marginal (additional) benefit to the consumer falls, hence consumers are prepared to pay less. This can be explained as follows: Most benefit is generated by the first unit of a good consumed because it satisfies all or a large part of the immediate need or desire. The income and substitution effect can also be used to explain why the demand curve slopes downwards. If we assume that money income is fixed, the income effect suggests that, as the price of a good falls, real income - that is, what consumers can buy with their money income - rises and consumers increase their demand. In addition, as the price of one good falls, it becomes relatively less expensive. Therefore, assuming other alternative products stay at the same price, at lower prices the good appears cheaper, and consumers will switch from the expensive alternative to the relatively cheaper one.





Frontiers of Microeconomics
Economics IS a study of the choices that people make and the resulting interactions they have with one another. This study has many facets, as we have ‘seen in the preceding chapters. Yet it would be a mistake to think that all the facets we have seen make up a finished jewel, perfect and unchanging Like all scientists, economists are always on the lookout for new areas to study and new phenomena to explain This final chapter on microeconomics offers an assortment of three topics at the discipline's frontier to see how economists are trying to expand their understanding of human behavior and society The first topic is the economics of asymmetric information. Many times in life, some people are better informed than others, and this difference in information can affect the choices they make and how they deal with one another. Thinking about this asymmetry can shed light on many aspects of the world from the market for used cars to the custom of gift giving The second topic we examine in this chapter is political economy. Throughout this book, we have seen many examples where markets fail and government policy can potentially improve matter But potentially is a needed qualifier: Whether this potential is realized depends on how well our political institutions work. The field of political economy uses the tools of economics to understand the functioning of government The third topic in this chapter is behavioral economics. This field brings some of the insights from psychology into the study of economic issues. It offers a view of human behavior that is more subtle and complex than that found In conventional economic theory, but this view may also be more realistic This chapter covers a lot of ground. To do so, it offers not a full helping of these three topics but instead, a taste of each. One goal is to show a few of the directions economists are heading in their effort to expand knowledge of how the economy works. Another goal is to whet your appetite for more courses economics.