What kind of relationship exists between price of a good and demand of its complementary good a direct B inverse C no effect D can be direct or inverse?

Complete the following statement:

The relationship between demand for a good and price of its substitute is ______.

• direct

• inverse

• no effect

• can be direct and inverse

The relationship between demand for a good and price of its substitute is direct.

  Is there an error in this question or solution?

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Complete the following statement:

The relationship between income and demand for inferior goods is ______.

• direct

• inverse

• no effect

• can be direct and inverse

The relationship between income and demand for inferior goods is inverse.

  Is there an error in this question or solution?

The law of demand is an economic principle that explains the negative correlation between the price of a good or service and its demand. If all other factors remain the same, when the price of a good or service increases, the quantity of demand decreases, and vice versa. When all other things remain constant, there is an inverse relationship, or negative correlation, between price and the demand for goods and services. 

For example, suppose all factors remain constant and the price of oil is rising significantly. When the price of oil increases, the price of a plane ticket increases as well. This will cause a fall in the demand for plane tickets, because ticket prices may be too expensive for average consumers.

Suppose an individual wants to travel to a city 500 miles away, and the price of one plane ticket is $500 as opposed to $200 last year. She may be less likely to travel by air due to the increase in price. This causes her quantity demanded for an airplane ticket to decrease to zero. She is more likely to choose a more cost-effective way to travel, such as taking a bus or a train.

Similarly, when the price of a product decreases, the quantity demanded increases. For example, suppose the price oil significantly decreases instead. This cuts the costs for airline companies and causes a decrease in the prices of airplane tickets. If airline companies are now only charging $100 as opposed to $500 in the previous example, the quantity demanded will increase. The individual may demand five tickets now, as opposed to zero before, because the price of one airplane ticket to travel 500 miles was cut by 80%.

(For related reading, see "Introduction to Supply and Demand.")

The law of demand is one of the most fundamental concepts in economics. It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services that we observe in everyday transactions.

The law of demand states that the quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded. This occurs because of diminishing marginal utility. That is, consumers use the first units of an economic good they purchase to serve their most urgent needs first, and then they use each additional unit of the good to serve successively lower-valued ends.

• The law of demand is a fundamental principle of economics that states that at a higher price consumers will demand a lower quantity of a good.
• Demand is derived from the law of diminishing marginal utility, the fact that consumers use economic goods to satisfy their most urgent needs first.
• A market demand curve expresses the sum of quantity demanded at each price across all consumers in the market.
• Changes in price can be reflected in movement along a demand curve, but do not by themselves increase or decrease demand.
• The shape and magnitude of demand shifts in response to changes in consumer preferences, incomes, or related economic goods, NOT to changes in price.

Economics involves the study of how people use limited means to satisfy unlimited wants. The law of demand focuses on those unlimited wants. Naturally, people prioritize more urgent wants and needs over less urgent ones in their economic behavior, and this carries over into how people choose among the limited means available to them. For any economic good, the first unit of that good that a consumer gets their hands on will tend to be put to use to satisfy the most urgent need the consumer has that that good can satisfy.

For example, consider a castaway on a desert island that obtains a six-pack of bottled, freshwater washed up onshore. The first bottle will be used to satisfy the castaway's most urgently felt need, most likely drinking water to avoid dying of thirst. The second bottle might be used for bathing to stave off disease, an urgent but less immediate need. The third bottle could be used for a less urgent need such as boiling some fish to have a hot meal, and on down to the last bottle, which the castaway uses for a relatively low priority like watering a small potted plant to keep him company on the island.

In our example, because each additional bottle of water is used for a successively less highly valued want or need by our castaway, we can say that the castaway values each additional bottle less than the one before. Similarly, when consumers purchase goods on the market each additional unit of any given good or service that they buy will be put to a less valued use than the one before, so we can say that they value each additional unit less and less. Because they value each additional unit of the good less, they are willing to pay less for it. So the more units of a good consumers buy, the less they are willing to pay in terms of the price.

By adding up all the units of a good that consumers are willing to buy at any given price we can describe a market demand curve, which is always downward-sloping, like the one shown in the chart below. Each point on the curve (A, B, C) reflects the quantity demanded (Q) at a given price (P). At point A, for example, the quantity demanded is low (Q1) and the price is high (P1). At higher prices, consumers demand less of the good, and at lower prices, they demand more.

In economic thinking, it is important to understand the difference between the phenomenon of demand and the quantity demanded. In the chart, the term "demand" refers to the green line plotted through A, B, and C. It expresses the relationship between the urgency of consumer wants and the number of units of the economic good at hand. A change in demand means a shift of the position or shape of this curve; it reflects a change in the underlying pattern of consumer wants and needs vis-a-vis the means available to satisfy them.

On the other hand, the term "quantity demanded" refers to a point along the horizontal axis. Changes in the quantity demanded strictly reflect changes in the price, without implying any change in the pattern of consumer preferences. Changes in quantity demanded just mean movement along the demand curve itself because of a change in price. These two ideas are often conflated, but this is a common error; rising (or falling) prices do not decrease (or increase) demand, they change the quantity demanded.

So what does change demand? The shape and position of the demand curve can be impacted by several factors. Rising incomes tend to increase demand for normal economic goods, as people are willing to spend more. The availability of close substitute products that compete with a given economic good will tend to reduce demand for that good, since they can satisfy the same kinds of consumer wants and needs. Conversely, the availability of closely complementary goods will tend to increase demand for an economic good, because the use of two goods together can be even more valuable to consumers than using them separately, like peanut butter and jelly.

Other factors such as future expectations, changes in background environmental conditions, or changes in the actual or perceived quality of a good can change the demand curve because they alter the pattern of consumer preferences for how the good can be used and how urgently it is needed.

The Law of Demand tells us that if more people want to buy something, given a limited supply, the price of that thing will be bid higher. Likewise, the higher the price of a good, the lower the quantity that will be purchased by consumers.

Together with the Law of Supply, the Law of Demand helps us understand why things are priced at the level that they are, and to identify opportunities to buy what are perceived to be underpriced (or sell overpriced) products, assets, or securities. For instance, a firm may boost production in response to rising prices that have been spurred by a surge in demand.

Yes, in certain cases an increase in demand does not affect prices in ways predicted by the Law of Demand. For instance, so-called Veblen goods are things whose demand increases as their price rises, as these are perceived as status symbols. Similarly, demand for Giffen goods (which in contrast to Veblen goods are not luxury items) rises when the price rises and falls when the price falls. Examples of Giffen goods can include bread, rice, and wheat. These tend to be common necessities and essential items with few good substitutes at the same price levels. Thus, people may start to hoard toilet paper even as its price goes up.