Law of demand

Definition

The law of demand is a fundamental principle in economics that describes the relationship between the price of a good or service and the quantity demanded by consumers.

What is law of demand?

Law of demand states that, assuming all other factors remain constant, when the price of a good or service rises, the quantity demanded of that good or service decreases. Conversely, when the price falls, the quantity demanded increases.

The relationship described by the law of demand is typically illustrated on a demand curve. The demand curve slopes downward from left to right, indicating that as price decreases, the quantity demanded increases, and as price increases, the quantity demanded decreases.

Changes in factors other than price can lead to shifts in the entire demand curve. For instance, changes in consumer preferences, income levels, or the prices of related goods can alter the quantity demanded at all price levels. These are called shifts in demand.

While the law of demand holds true for most goods, there are exceptions. Giffen goods are rare examples where an increase in price can lead to an increase in quantity demanded. This is typically seen in very specific circumstances where the good is considered a necessity and there are no close substitutes.

The law of demand is a universal economic principle applicable in markets around the world, regardless of cultural or regional differences.

What factors affect the law of demand?

The law of demand states that as the price of a good or service increases, the quantity demanded decreases, and vice versa. Several factors influence the law of demand:

• Price of the good: A higher price typically reduces demand, while a lower price increases demand.
• Income of consumers: Higher incomes generally increase demand for normal goods, while decreasing incomes may reduce demand.
• Price of related goods: Changes in the prices of substitutes or complements affect demand. Lower prices of substitutes or higher prices of complements can increase demand.
• Consumer preferences: Shifts in consumer preferences or trends can impact demand independently of price changes.
• Expectations: Anticipated future price changes or economic conditions can influence current demand decisions.

Demand vs. quantity demanded

Demand and quantity demanded are distinct concepts in economics. Demand refers to the entire relationship between the price of a good and the quantity demanded at each price, represented graphically as a demand curve. It includes all possible price-quantity combinations consumers are willing and able to buy at a given time. Quantity demanded, on the other hand, refers to the specific quantity of a good or service that consumers are willing to buy at a particular price point. It represents a single point on the demand curve and changes with shifts in price, holding other factors constant.

Example of law of demand

Let’s consider the law of demand in the context of smartphones. The current market price of a popular smartphone model is £800, and consumers are buying approximately 50,000 units per month.

The smartphone manufacturer decides to reduce the price of the model to £700, making it more affordable for consumers. As a result of the price reduction, consumers find the smartphone more attractive at the lower price point. The quantity demanded increases, and now 70,000 units are sold per month.

Encouraged by the initial success, the manufacturer decides to reduce the price further to £600. The lower price stimulates even greater demand for the smartphone. Now, at the £600 price point, consumers are purchasing 90,000 units per month.

In this example, the law of demand is demonstrated as a decrease in the price of smartphones leads to an increase in the quantity demanded. Conversely, if the price increase the quantity demanded would likely decrease.