Engineering Economy

Price Demand Relationship

Goods and services can be categorized as necessities or luxuries, though this distinction is relative and depends on individual circumstances. For example, a car may be a necessity in one location but a luxury in another with good public transport. Regardless of classification, there is a general inverse relationship between price and demand: as the price increases, demand decreases; as the price decreases, demand increases. This relationship is often represented as a linear function on a graph.

Figure 1

Price-Demand Relationship