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Table of Contents

Negative Correlation: Quantity vs. Price

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Updated September 12, 2023
Reviewed by Charles Potters
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The law of demand is an economic principle that explains the negative correlation between the price of a good or service and its demand. When the price of a good or service increases, the demand decreases. If there is a price decrease, demand will likely increase. 

Key Takeaways

  • The law of demand explains the negative correlation between the price of a good or service and its demand.
  • When the price of a good or service increases, the demand decreases.
  • Demand commonly increases when there is a price decrease. 

Price vs. Demand

When all other things remain constant, there is an inverse relationship, or negative correlation, between price and the demand for goods and services. A negative correlation or inverse correlation indicates that two individual variables have a statistical relationship such that their prices generally move in opposite directions from one another. As the price of goods increases, demand falls. Similarly, when the price of a product decreases, the quantity demanded increases.

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Price elasticity of demand is a measurement of the change, how much or how little, in the consumption of a product with a change in its price.

Negative Correlation Example

Suppose all factors remain constant and the price of oil rises significantly. When the price of oil increases, the cost of a plane ticket increases. This will likely cause a fall in the demand for plane tickets or airline travel.

If the price of one plane ticket rises to $500 from $200, a consumer's quantity demanded for an airplane ticket may decrease to zero, and they may opt for a more cost-effective way to travel, such as by bus or train. If the price of oil significantly decreases, the costs for airline companies and ticket prices decrease. The $500 ticket may fall to $100, and the consumer may choose air travel instead of by car or train.

What Is the Difference Between Price Elasticity and Inelasticity?

If the quantity demanded of a product changes greatly in response to changes in its price, it is elastic. If the quantity purchased shows a small change after a change in its price, it is inelastic.

How Does the Availability of Substitutes Affect Demand?

When a product's price increases but substitutes are available, consumers may move to the cheaper alternative. 

What Are Price Controls?

Price controls are government-mandated minimum or maximum prices for specific goods and services. They may be implemented to manage the affordability of goods and services, including rent, gasoline, and food. 


The Bottom Line

The law of demand explains the negative correlation between the price of a good or service and its demand. As the price of goods increases, demand falls, and when the price of a product decreases, the demand increases. Price elasticity of demand measures the specific change in the demand for a product versus its price change.

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