What Is an Inverse Relationship in Economics?
An inverse relationship in economics is a relationship in which an increase in one variable corresponds with a decrease in another variable. The law of demand illustrates this inverse relationship. It states that, with all things being equal, as price falls, demand rises.
In economics, the graph for this relationship appears as a line with a downward slope of negative 1.25. Economist A. W. H. Phillips found an inverse relationship between unemployment and inflation known as the Phillips Curve. Mr. Phillips discovered that high unemployment led to slower wage increases, and conversely, low unemployment led to quicker wage increases. An example of an inverse relationship in macroeconomics is the interest rate and the demand for cash. As the demand for money increases, the interest rate decreases and vice versa.