Law of demand states that the level of demand for a good or service increases when its price decreases. For example, when the price of grapes increases to $3.99 a pound in January, the demand for grapes is lower than when the price was .99 a pound in October. Consumers buy oranges instead as a substitute good, for $1.99 per pound. This creates a downward sloping curve for grapes.
A demand curve that is flat or horizontal means the price of the good or service is highly elastic. Highly elastic goods tend to be goods with a wide range of substitutions, such as candy, chips, or soda. Highly elastic goods also tend to be goods that are not strictly 'necessities,' like restaurant meals or movie tickets. If a movie ticket's price grows prohibitively high, a consumer can always rent films for free from the library. Movies are regarded as entertainment, not necessities, and there are many substitutions for movies shown in a theater.
A demand curve that is nearly vertical in its trajectory indicates that demand is highly inelastic. Inelastic goods tend to have few substitutions and are essential, such as gasoline, food, and medicine. Very few goods are inelastic over a long period of time. High gas prices often cause consumers to cut back on leisure-time travel, use public transportation or carpool, or buy more fuel-efficient vehicles. Even expensive prescription medicines can be substituted with generic versions, if such products are available (Elasticity, 2009, Spark Notes, p.2).
With certain luxury goods, the reverse of the law of demand holds true: the higher the price, the greater the perception of quality. A pair of Seven jeans or a pair of Sears jeans can be equally functional as clothing: but the greater social status given to the brand-name, designer jeans results in a higher price and greater demand for Seven jeans (Elasticity, 2009, Spark Notes, p.1). High prices can have a 'signaling' effect, justified or not, that the item is especially socially desirable or of higher quality (Thomas et al. 2004). High prices can also act as a form of screening of a 'certain type of customer:' the high rents in the Hamptons ensure that only very wealthy people can afford to rent or buy property in the area, making property in the region desirable because of its high price, although many other nice, seaside towns may be equally close to the ocean.
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