Student: Sanchayn Lawrence
Eastern Florida State College
Main Title: Law of Demand
Law of Demand microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa. The law of demand says that the higher the price, the lower the quantity demanded, because consumers’ opportunity cost to acquire that good or service increases, and they must make more tradeoffs to acquire the more expensive product. The chart below depicts the law of demand using a demand curve, which is always downward sloping. Each point on the curve (A, B, C) reflects a direct correlation between quantities demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on.
The law of demand is so intuitive that you may not even be aware of all the examples around you. When shirts go on sale, you might buy three instead of one. The quantity that you demand increases because the price has fallen. When plane tickets become more expensive, you’re less likely to travel by air and more likely to choose the less expensive options of driving or staying home. The amount of plane tickets that you demand decreases to zero because the cost has gone up. The law of demand summarizes the effect price changes have on consumer behavior. For example, a consumer will purchase more pizzas if the price of pizza falls. The opposite is true if the price of pizza increases. John might demand 10 pizzas if they cost $10 each, but only 7 pizzas if the price rises to $12, and only 4 pizzas if the price rises to $20. The law of demand is one of the most fundamental concepts in economics. It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services. Experimental results for the ultimatum game have been interpreted as contradicting some implications of...
What is the 'Law of Demand'
The law of demand states that quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded. The reason for this phenomenon is that consumers' opportunity cost increases, so they must give something else up or switch to a substitute product.
BREAKING DOWN 'Law of Demand'
The chart below depicts the law of demand using a demand curve, which is always downward-sloping. Each point on the curve (A, B, C) reflects the quantity demanded (Q) at a given price (P). At point A, for example, the quantity demanded is Q1 and the price is P1.
The law of demand is one of the most fundamental concepts in economics. It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services.
The Law of Demand in Practice
The "curve" above is simplified as a straight line, but in fact the shape of the curve varies by product. Demand curves are generally concave, reflecting the fact that consumers can become saturated with a given product: How many pairs of underwear can you wear, or cars can you park in your garage?
It's important to make a distinction between temporary and longer-term price changes, particularly in online shopping with its fine-grained price changes. Consumers might buy more of an item on temporary discount to 1) stock up on nonperishables they will need before the items go on sale again (shirts, for example), 2) make a long-planned purchase at a lower price (a big screen television), 3) get the current model of a product before a new model is released (cars or smartphones), or 4) on impulse.
For longer-term prices, consumers will prefer more quantity at lower prices. The question is whether falling costs enable those lower prices that consumers prefer. This leads to the interaction with the law of supply and the supply curve. In the U.S., the average price of goods, excluding food and fuel, has been falling since 1995 due to technological innovation and globalized trade's downward pressure on costs.
By contrast, prices of services that are provided locally, provided on an individual basis and subject to regulation, tend to be increasing. Examples include dental services and nail salons.