What determines the relationship between price and quantity demanded?

The law of demand establishes the fundamental relationship between price and quantity demanded, indicating that, all else being equal, when the price of a good falls, the quantity demanded increases, and conversely, when the price rises, the quantity demanded decreases. This inverse relationship is essential to microeconomic theory, as it helps to explain consumer behavior and market dynamics.

The law of demand reflects consumer preferences and choices. When prices are lower, consumers are typically more willing to purchase more of the product because they perceive greater value or affordability. Thus, the law of demand forms a foundational principle that underpins much of economic analysis regarding how market prices interact with consumer demand.

While the other choices do relate to demand in different ways, they do not directly define the relationship between price and quantity demanded as clearly as the law of demand does. For example, the principle of substitution refers to how consumers may switch between products based on changes in price but does not itself establish the direct relationship described by the law of demand. Elasticity of demand measures how responsive quantity demanded is to a change in price, but it does not dictate the nature of the relationship itself. The theory of value addresses the perceived worth of goods and services but does not specifically detail the price-quantity demanded dynamic.