Law of Demand

What is the Law of Demand?

A key concept in economics is the Law of Demand, which explains the relationship between a good’s price and the quantity consumers are willing to buy. It forms the foundation of market economies, illustrating how prices and quantities are determined.

Important Concepts Related to the Law of Demand

The Law of Demand explains how consumers buy more when prices drop. Key concepts related to this law help in understanding market behavior.

Inverse Relationship

This law demonstrates an inverse relationship that exists between price and quantity demanded. This means that as prices go down, demand falls, while increasing demand may lead to declining prices.

Ceteris Paribus

It can be used under ceteris paribus, meaning “other things being equal”. Under these assumptions, only changes in price are taken into account, with no consideration given to other determinants like income levels, preference costs, or substitute goods, among others.

A graphical representation of the relationship between price and quantity demanded can be done by economists using what they call a demand curve that slopes downward from left to right, meaning that a price increase will lead to fewer units sold, whereas if prices fall, the quantity of goods sold increases.

Factors Affecting Demand

The Law of Demand is an oversimplification of a complex phenomenon, and other factors influence demand:

• Income levels. Changes in consumers’ income determine their purchasing power and how much they can buy. It follows that high incomes will result in more demand, while low incomes mean less demand.
• Tastes and preferences. Changes in taste preferences by consumers often lead to shifts in demand. For instance, the introduction of a new health policy may cause an increase in consumer demand for organic foods.
• Prices of related goods. For example, substitutes and complements affect the demand for a good not only through price changes but also by other means as well. A rise in coffee prices might result in increased tea demand.
• Future expectations. This current demand reflects consumers’ expectations about future prices and incomes, among other factors such as inflationary expectations.

These factors could potentially shift the entire demand curve, altering the quantity demanded at each price level.

Examples of The Law of Demand

The Law of Demand shows how people buy more when prices fall and less when prices rise. Simple examples highlight this basic economic principle.

Grocery Shopping

When apples become more expensive, most people avoid buying them and are even willing to pay any amount for one, like what is happening now, showing how the Law of Demand is working.

Technology Products

During sales events, smartphone prices are often reduced, and this usually results in increased purchases, indicating the inverse relationship that exists between price and demand.

Gasoline

An increase in gasoline prices may make consumers use less or switch to other methods of transport as a result of the decreased quantity decrease demanded.

Exceptions to the Law of Demand

There are some cases which don’t follow the usual Law of Demand:

• Giffen goods. These are backward goods whose higher prices lead to an increase in demand because they have much more influence on income rather than the alternative effect. For instance, staple foods may be Giffen goods in a less developed economy.
• Veblen goods. These are high-priced luxury products for which an increase in buyer requirements occurs because they somehow serve as symbols of status. Examples include fancy clothes or expensive vehicles.
• Essential goods. There might be little elasticity of demand for certain essential goods even when their prices change. These might include basic drugs, utilities, and so on.

Understanding these exceptions helps in recognizing the complexity of consumer behavior in different market scenarios.