What is the law of demand? Use the substitution effect and the income effect to explain why an increase in the price of a product causes a decrease in the quantity demanded.

The substitution effect is integral to understanding why consumers may choose different products as prices fluctuate. When the price of a good or service increases, it becomes relatively more expensive compared to other alternatives. Consumers, responding to this price change, may decide it's economically beneficial to purchase a less expensive substitute instead. Take for example, if the cost of beef spikes, shoppers might switch to buying chicken, which, assuming its price remains stable, now represents a better value.

This behavior reflects the natural propensity of individuals to seek value for their money. It's not just about seeking the cheapest option; it's about adjusting choices based on the relative cost of similar goods. The impact of this effect is directly observed in the market as a shift in the quantity demanded for both the higher-priced good and its substitutes.

The income effect takes a different approach to explain changes in a consumer's purchasing behavior due to price changes. Rather than looking at alternatives, it focuses on how a consumer's perceived wealth or purchasing power is affected when prices change. If prices go up and the consumer’s income stays the same, they can't buy as much as they used to, effectively making them feel poorer.

For instance, if the cost of petrol increases, a driver with a fixed budget for fuel may find they can no longer afford to fill up their tank as often. This change means they are now less able to purchase this item even if their desire for it hasn't decreased. The income effect hence can cause a decrease in the quantity demanded because the consumer’s ability to buy products decreases with the increase in price.

Quantity demanded is a term used to describe the total amount of a product or service that consumers are willing and able to purchase at a given price. It is an essential component of the law of demand which indicates an inverse relationship; as the price of an item goes up, the quantity demanded generally goes down and vice versa.

It's crucial to distinguish 'quantity demanded' from 'demand'. The former refers to a specific point on the demand curve at a particular price, while the latter describes the entire demand curve. Changes in price cause movements along the demand curve, showing different quantities demanded without the curve itself shifting.

Consumer purchasing power signifies the value of currency that consumers hold to buy goods and services. It's a measure of the financial capability of an individual or population to make purchases. This power is directly affected by inflation and the relative prices of goods. If prices rise and incomes remain stagnant, purchasing power diminishes because money doesn’t go as far as it used to, meaning consumers can buy less.

Therefore, an increase in the price of goods without a corresponding increase in consumer incomes reduces the quantity of goods and services they can afford, reinforcing the law of demand. In essence, sustained purchasing power is vital for maintaining the quantity demanded, and thereby, the stability of the market.