What is the effect of higher prices according to the law of demand?

According to the law of demand, higher prices generally lead to a decrease in the quantity demanded for a good or service. This principle is grounded in the economic concept that consumers tend to buy less of a product as its price rises, all else being equal. The rationale behind this behavior is that as prices increase, consumers may find alternative products that are more affordable or may limit their purchases altogether due to budget constraints.

In a competitive market, higher prices can discourage consumers because they have to allocate more of their income to purchase the same amount of goods they might have bought at a lower price. Consequently, this results in a contraction in demand, demonstrating a key aspect of consumer behavior where price sensitivity plays a crucial role.

In contrast, the other choices present scenarios that do not align with this law. An increase in supply would indicate manufacturers producing more goods, which does not directly relate to consumer demand. An increase in quantity demanded occurs when prices decrease, creating a reverse relationship. Stagnation in market activity implies no change in either demand or supply, which does not reflect the dynamic across price changes described by the law of demand.