Why do we buy less when prices drop? The math of choice.
In short: The Law of Demand suggests that lower prices lead to higher quantity demanded, but the underlying mechanics are more complex than simple math. This video breaks down the two primary drivers of consumer behavior: the substitution and income effects.
Microeconomics examines how individual decision-makers—like households and firms—respond to incentives. When a product's price changes, it triggers two distinct psychological and financial shifts. The substitution effect occurs when consumers switch to cheaper alternatives, while the income effect reflects the change in a consumer's purchasing power as their real wealth fluctuates.
Understanding these dual forces explains why the demand curve slopes downward. By analyzing these mechanisms, learners can better grasp how market structures and incentives influence the broader economic outcomes of everyday life.
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Sources
- Summary by Intellect · source: Substitution and income effects and the Law of Demand | APⓇ Microeconomics | Khan Academy
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