Clearly, prices influence our decisions. As the price of a good increases, we have to give up more of other goods if we want to buy it. Thus, as the price of a good rises, its opportunity cost increases (in terms of other goods that must be forgone to purchase it). A basic principle of economics is that if something becomes more costly, people will be less likely to buy it. This principle is called the law of demand.
The law of demand states that there is an inverse (or negative) relationship between the price of a good or service and the quantity of it that consumers are willing to purchase. This inverse relationship means that price and the quantity consumers wish to purchase move in opposite directions. As the price increases, buyers purchase less-and as the price decreases, buyers purchase more.
The availability of substitutes~goods that perform similar functions-helps explain this inverse relationship. No single good is absolutely essential; everything can be replaced with something else. A chicken sandwich can be substituted for a cheeseburger. Wood, aluminum, bricks, and glass can take the place of steel. Going to the movies, playing tennis, watching television, and going to a football game are substitute forms of entertainment. When the price of a good increases, people cut back on it and buy substitute products.