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What Is the Law of Demand?

Understanding the law of demand, demand vs. quantity demanded, factors affecting demand, law of supply.

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• Guide to Microeconomics

What Is the Law of Demand in Economics, and How Does It Work?

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The law of demand is one of the most fundamental concepts in economics. Alongside the law of supply , it explains how market economies allocate resources and determine the prices of goods and services.

The law of demand states that the quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded. This occurs because of diminishing marginal utility . That is, consumers use the first units of an economic good they purchase to serve their most urgent needs first, then they use each additional unit of the good to serve successively lower-valued ends.

Key Takeaways

• The law of demand is a fundamental principle of economics that states that at a higher price, consumers will demand a lower quantity of a good.
• Demand is derived from the law of diminishing marginal utility, the fact that consumers use economic goods to satisfy their most urgent needs first.
• A market demand curve expresses the sum of quantity demanded at each price across all consumers in the market.
• Changes in price can be reflected in movement along a demand curve, but by themselves, they don't increase or decrease demand.
• The shape and magnitude of demand shifts in response to changes in consumer preferences, incomes, or related economic goods, not usually to changes in price.

Economics involves the study of how people use limited means to satisfy unlimited wants. The law of demand focuses on those unlimited wants. Naturally, people prioritize more urgent wants and needs over less urgent ones in their economic behavior, and this carries over into how people choose among the limited means available to them.

For any economic good, the first unit of that good that a consumer gets their hands on will tend to be used to satisfy the most urgent need the consumer has that that good can satisfy.

For example, consider a castaway on a desert island who obtains a six-pack of bottled fresh water that washes up onshore. The first bottle will be used to satisfy the castaway’s most urgently felt need, which is most likely drinking water to avoid dying of thirst.

The second bottle might be used for bathing to stave off disease, an urgent but less immediate need. The third bottle could be used for a less urgent need, such as boiling some fish to have a hot meal, and on down to the last bottle, which the castaway uses for a relatively low priority, such as watering a small potted plant to feel less alone on the island.

Because each additional bottle of water is used for a successively less highly valued want or need by our castaway, we can say that the castaway values each additional bottle less than the one before.

The more units of a good that consumers buy, the less they are willing to pay in terms of price.

Similarly, when consumers purchase goods on the market, each additional unit of any given good or service that they buy will be put to a less valued use than the one before, so we can say that they value each additional unit less and less. Because they value each additional unit of the good less , they aren't willing to pay as much for it.

By adding up all the units of a good that consumers are willing to buy at any given price, we can describe a market demand curve , which is always sloping downward, like the one shown in the chart below. 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 low (Q1) and the price is high (P1). At higher prices, consumers demand less of the good, and at lower prices, they demand more.

In economic thinking, it is important to understand the difference between the phenomenon of demand and the quantity demanded. In the chart above, the term “demand” refers to the light blue line plotted through A, B, and C.

It expresses the relationship between the urgency of consumer wants and the number of units of the economic good at hand. A change in demand means a shift of the position or shape of this curve; it reflects a change in the underlying pattern of consumer wants and needs vis-à-vis the means available to satisfy them.

On the other hand, the term “quantity demanded” refers to a point along the horizontal axis. Changes in the quantity demanded strictly reflect changes in the price, without implying any change in the pattern of consumer preferences.

Changes in quantity demanded just mean movement along the demand curve itself because of a change in price. These two ideas are often conflated, but this is a common error—rising (or falling) prices don't decrease (or increase) demand; they change the quantity demanded .

So what does change demand? The shape and position of the demand curve can be affected by several factors. Rising incomes tend to increase demand for normal economic goods, as people are willing to spend more. The availability of close substitute products that compete with a given economic good will tend to reduce demand for that good because they can satisfy the same kinds of consumer wants and needs.

Conversely, the availability of closely complementary goods will tend to increase demand for an economic good because the use of two goods together can be even more valuable to consumers than using them separately, like peanut butter and jelly.

Other factors such as future expectations, changes in background environmental conditions, or changes in the actual or perceived quality of a good can change the demand curve because they alter the pattern of consumer preferences for how the good can be used and how urgently it is needed.

Supply is the total amount of a specific good or service that is available to consumers at a certain price point. As the supply of a product fluctuates, so does the demand, which directly affects the price of the product.

The law of supply, then, is a microeconomic law stating that, all other factors being equal, as the price of a good or service rises, the quantity that suppliers offer will rise in turn (and vice versa). When demand exceeds the available supply, the price of a product typically will rise. Conversely, should the supply of an item increase while the demand remains the same, the price will go down.

What is a Simple Explanation of the Law of Demand?

The law of demand tells us that if more people want to buy something, given a limited supply, the price of that thing will be bid higher. Likewise, the higher the price of a good, the lower the quantity that will be purchased by consumers.

Why Is the Law of Demand Important?

Together with the law of supply, the law of demand helps us understand why things are priced at the level that they are, and to identify opportunities to buy what are perceived to be underpriced (or sell overpriced) products, assets, or securities . For instance, a firm may boost production in response to rising prices that have been spurred by a surge in demand.

Can the Law of Demand Be Broken?

Yes. In certain cases, an increase in demand doesn't affect prices in ways predicted by the law of demand. For instance, so-called Veblen goods are things for which demand increases as their price rises, as they are perceived as status symbols. Similarly, demand for Giffen goods (which, in contrast to Veblen goods, aren't luxury items) rises when the price goes up and falls when the price falls. Examples of Giffen goods can include bread, rice, and wheat. These tend to be common necessities and essential items with few good substitutes at the same price levels.

The law of demand posits that the price of an item and the quantity demanded have an inverse relationship. Essentially, it tells us that people will buy more of something when its price falls and vice versa.  When graphed, the law of demand appears as a line sloping downward.

This law is a fundamental principle of economics. It helps to set prices, understand why things are priced as they are, and identify items that may be overpriced or underpriced.

University of Southern Philippines Foundation. " Law of Demand ," Page 1.

Econlib. " Demand ."

University of Pittsburgh. " Supply and Demand ," Page 1.

University of Pittsburgh. " Supply and Demand ," Page 3.

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Demand Factors and Law of Demand Essay

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Introduction

The law of demand, factors affecting the demand of commodities, conclusion of law of demand.

People often exercise choice because human wants are infinite while the resources available are scarce. For the satisfaction of human wants to occur, there must be a relationship between the production of commodities and their corresponding pricing system. In the market, the forces of demand and supply determine the prices of goods and services.

At the same time, the prices of goods and services affects demand and supply (Suri, 2011). In ordinary terms, demand refers to desire or urge of purchasing commodities. In economic terms however, demand is something beyond a plain desire. Demand in this sense represents a want supported by the power or capability to purchase.

The law of demand asserts that all other factors kept constant, the price and quantity demanded are inversely proportional. For instance, a company selling snacks may sell approximately 100,000 cookies at $1 each. If the company decreases the price of its cookies to $0.75 each, the number of cookies sold may increase to 115,000.

On the other hand, if the company decides to increase the price per cookies to $1.25, the number of cookies sold may reduce to approximately 85,000. This can only apply when all other factors like customer preference are constant (Saint-Leger, 2011).

In this regard, there are various assumptions made in relation to the law of demand for the establishment of the price-demand relationship. These assumptions include assuming that the income of consumers does not change, there are no changes in preferences and tastes of consumers, prices of other goods remain constant and there are no changes in the size and composition of the consumer population (Akrani, 2009).

A demand curve clearly represents the effect of price on the quantity of goods and services demanded. In the demand curve, the quantity demanded lies on the horizontal axis while the price lies on the vertical axis. Any change in the price causes a shift along the demand curve. However, there are other factors that can cause a shift in the demand curve other than price. These may include price alterations for complement goods, consumer demand for alternate goods and customer preferences (Saint-Leger, 2011).

Even though it is evident that quantity demanded changes as price of commodities changes, such a change varies from commodity to commodity. This means that the amount of change is not constant for all commodities.

In this case, some goods and services respond more to changes in price while others respond less. Elasticity of demand explains the extent of the responsiveness of quantity demanded in relation to changes in price. This means that the elasticity of demand explains further the relationship of price and demand (Akrani, 2009).

There are various factors that affect the demand of goods and services. The major factor is price of goods and services. In most cases, the quantity of a product purchased by a customer depends on the price of that particular commodity. In this case, people are less willing to purchase a commodity when the price of such a commodity increases. On the other hand, customers will purchase a certain commodity in large volumes if the price of the commodity reduces (Sothern, 2011).

Another factor that influences the demand of commodities is of the size of the income of customers. In general, consumers will buy more when their income increases and buy less when their income reduces. As the income of some people increase, their consumption increase causing an increase in the demand for various commodities. For the goods which are superior and of good quality, the increase in income causes increase in their demand. On the other hand, demand for inferior goods reduces with increase in income levels (Suri, 2011).

The number of buyers at a specific time also influences the demand for goods and services. For instance, the demand for stationery increases during the periods when the schools are opening. In addition, there is an increased demand for clothes and playing dolls for children during the holidays especially the Christmas period. The demand for these goods however reduces when the holidays are over (Sothern, 2011).

The black Friday is a very important day in America, which influences the demand for commodities. Economists site this day as the most important day of the year for the economy of United States. During this day, Americans flock in the shopping malls to purchase items and commodities for the Christmas celebrations.

During this time, the demand for various commodities like electronics, children playing items and clothes increase heavily. In addition, most traders reduce the prices of some commodities during this day causing the demand to increase further. According a survey by the National Retail Federation (NRF), some 152 million people purchase heavily discounted commodities during this day (Washington, 2011).

The law of demand is an important concept in economics. It explains the relationship between the quantity of goods and services demanded and other factors including price, preferences, income and number of buyers. Business owners and companies should take time to understand the law of demand and comprehend the various factors that may increase demand for their products.

This will help them to maximize their sales since they will perfectly understand the market during specific periods. The understanding of the law of demand is also useful in determining the quantity of supply needed for a particular commodity.

Akrani, G. (2009). Demand in Economics: Law of Demand and Elasticity of Demand . Web.

Saint-Leger, R. (2011). The Determinants of Demand That Will Shift the Demand Curve . Web.

Sothern, M. (2011). What Are the Factors Affecting Demand Economics? Web.

Suri, S. (2011). Seven Factors that influences the Demand for a Commodity . Web.

Washington, J. S. (2011). Black Friday: Most important day of the year for the US economy . Web.

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Law of Demand – Definition, Explanation

The law of demand states that ceteris paribus (other things being equal)

• If the price of good rises, then the quantity demanded will fall
• If the price of a good falls, then the quantity demand will rise.

At point (A) Price is £1.20 and the quantity demand is 40,000 tonnes. When the price falls to £0.90, the quantity demanded rises to 55,000 tonnes (point B)

If the price fell to £0.70, demand would rise to 75,000.

What explains the law of demand?

There are two factors that explain the inverse relationship between price and quantity demand.

1. Income effect . If prices rise, people will feel poorer after purchasing the more expensive goods. They will have less disposable income and so cannot afford to buy as much. If you have an income of £100, then an increase in the price of goods, your real income is effectively falling.

2. Substitution effect . If the price of one good rise, consumers will be encouraged to buy alternative goods which are now relatively cheaper than they were. For example, if the price of potatoes rises, it will encourage consumers to buy rice instead.

Demand Schedule

A demand schedule is a table showing the different quantities of a good that consumers are willing and able to buy at various prices for a particular period.

This is the market demand schedule for Netflix subscriptions

Demand Curve

A demand curve can be for an individual consumer or the whole market (market demand curve)

Exceptions to the law of demand

Giffen Good . This is good where a higher price causes an increase in demand (reversing the usual law of demand). The increase in demand is due to the income effect of the higher price outweighing the substitution effect. The idea is that if you are very poor and the price of your basic foodstuff (e.g. rice) increases, then you can’t afford the more expensive alternative food (meat) therefore, you end up buying more rice because it is the only thing you can afford. These goods are very rare and require a society with very low income and limited consumer choices.

Veblen good/ostentatious good . This is where if the price rises, then some people may want to buy more because the higher price makes the good appear more attractive. For example, if designer clothing becomes more expensive than for some individuals, the higher price makes it more expensive. However, whilst individual demand curves may be upward sloping. The market demand curve is unlikely to be. Because although it may be more desirable not everyone can afford it. In fact, the super-rich wants to buy more – precisely because it is exclusive.

Nobody buys the cheapest. Another possibility is that in restaurants, the most popular wine is the second cheapest. This is due to the behavioural choices of consumers. When going out to a restaurant, people don’t like to buy the cheapest wine because it suggests you don’t care about giving diners a good meal. Therefore, often the second cheapest wine often sells more because people think they are getting better quality. Therefore, if you increase the price of the cheapest wine, its demand may actually rise.

Perfectly inelastic . If demand is perfectly inelastic, then an increase in the price has no effect on reducing demand. This may be good like salt, which is very cheap but essential.

Perfectly elastic . Demand is infinite at a certain price, therefore reducing the price will not change the quantity demanded.

• Factors affecting demand
• Shift in Demand and Movement along the Demand Curve

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The Law of Demand (With Diagram)

In this article we will discuss about:- 1. Introduction to the Law of Demand 2. Assumptions of the Law of Demand 3. Exceptions.

Introduction to the Law of Demand :

The law of demand expresses a relationship between the quantity demanded and its price. It may be defined in Marshall’s words as “the amount demanded increases with a fall in price, and diminishes with a rise in price”. Thus it expresses an inverse relation between price and demand. The law refers to the direction in which quantity demanded changes with a change in price.

On the figure, it is represented by the slope of the demand curve which is normally negative throughout its length. The inverse price- demand relationship is based on other things remaining equal. This phrase points towards certain im­portant assumptions on which this law is based.

Assumptions of the Law of Demand:

These assumptions are:

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(i) There is no change in the tastes and preferences of the consumer;

(ii) The income of the consumer remains constant;

(iii) There is no change in customs;

(iv) The commodity to be used should not confer distinction on the consumer;

(v) There should not be any substitutes of the commodity;

(vi) There should not be any change in the prices of other products;

(vii) There should not be any possibility of change in the price of the product being used;

(viii) There should not be any change in the quality of the product; and

(ix) The habits of the consumers should remain unchanged. Given these conditions, the law of demand operates. If there is change even in one of these conditions, it will stop operating.

Given these assumptions, the law of demand is explained in terms of Table 3 and Figure 7.

Law of Demand: Assumptions, Exceptions and Limitations

The law of demand states that, other things remaining the same, the quantity demanded of a commodity is inversely related to its price.

It is one of the important laws of economics which was firstly propounded by neo-classical economist, Alfred Marshall.

Other things remaining the same, the amount demanded increases with a fall in price and diminishes with a rise in price. – Alfred Marshall

Thus, according to the law of demand, there is an inverse relationship between price and quantity demanded, other things remaining the same.

Law of demand expresses the functional relationship

where, P is price and D is quantity demanded of a commodity

Other things being equal , if a price of a commodity falls, the quantity demanded of it will rise, and if the price of the commodity rises, its quantity demanded will decline.

Assumptions under which law of demand is valid

This law will be applicable only if the below mentioned points are fulfilled.

• No change in price of related commodities.
• No change in income of the consumer.
• No change in taste and preferences, customs, habit and fashion of the consumer.
• No change in size of population
• No expectation regarding future change in price.

Understanding law of demand using demand schedule

This law can be explained with the help of demand schedule and demand curve as presented below:

Demand Schedule is a tabular representation of various combinations of price and quantity demanded by a consumer during a particular period of time. An imaginary demand schedule is given below:

The above demand schedule shows negative relationship between price and quantity demanded for a commodity.

Initially, when a price of a good is Rs.10 per kg, quantity demanded by the consumer is 10 kg.

As the price decrease from Rs.10 per kg to Rs.8 per kg and then to Rs.6 per kg, quantity demanded by the consumer increases from 10 kg to 20 kg and then to 30 kg respectively.

Further, fall in price from Rs.6 per kg to Rs.4 per kg and then to Rs.2 per kg, results in increase in quantity demanded by the consumer from 30 kg to 40 kg and then to 50 kg, respectively.

Thus, from the above schedule we can conclude that there is opposite inverse relationship in between price and quantity demanded for a commodity.

Understanding law of demand using demand curve

It is the graphical representation of demand schedule. In other words, it is a graphical representation of the quantities of a commodity which will be demanded by the consumer at various particular prices in a particular period of time, other things remaining the same.

We can show, the above demand schedule through the following demand curve:

In the figure above, price and quantity demanded are measured along the y-axis and x-axis respectively. By plotting various combinations of price and quantity demanded, we get a demand curve DD 1 derived from points A , B , C , D and E .

This is a downward sloping demand curve showing inverse relationship between price and quantity demanded.

Limitations/Exceptions of law of demand

Inferior goods/ giffen goods.

Some special varieties of inferior goods are termed as giffen goods. Cheaper varieties of goods like low priced rice, low priced bread, etc. are some examples of Giffen goods.

This exception was pointed out by Robert Giffen who observed that when the price of bread increased, the low paid British workers purchased lesser quantity of bread, which is against the law of demand. Thus, in case of Giffen goods, there is indirect relationship between price and quantity demanded.

Goods having prestige value

This exception is associated with the name of the economist, T.Velben and his doctrine of conspicuous conception. Few goods like diamond can be purchased only by rich people. The prices of these goods are so high that they are beyond the capacity of common people. The higher the price of the diamond the higher the prestige value of it.

In this case, a consumer will buy less of the diamonds at a low price because with the fall in price, its prestige value goes down. On the other hand, when price of diamonds increase, the prestige value goes up and therefore, the quantity demanded of it will increase.

Price expectation

When the consumer expects that the price of the commodity is going to fall in the near future, they do not buy more even if the price is lower.

On the other hand, when they expect further rise in price of the commodity, they will buy more even if the price is higher. Both of these conditions are against the law of demand.

Fear of shortage

When people feel that a commodity is going to be scarce in the near future, they buy more of it even if there is a current rise in price.

For example: If the people feel that there will be shortage of L.P.G. gas in the near future, they will buy more of it, even if the price is high.

Change in income

The demand for goods and services is also affected by change in income of the consumers.

If the consumers’ income increases, they will demand more goods or services even at a higher price. On the other hand, they will demand less quantity of goods or services even at lower price if there is decrease in their income. It is against the law of demand.

Change in fashion

The law of demand is not applicable when the goods are considered to be out of fashion.

If the commodity goes out of fashion, people do not buy more even if the price falls. For example: People do not purchase old fashioned shirts and pants nowadays even though they’ve become cheap. Similarly, people buy fashionable goods in spite of price rise.

Basic necessities of life

In case of basic necessities of life such as salt, rice, medicine, etc. the law of demand is not applicable as the demand for such necessary goods does not change with the rise or fall in price.

[ Related Reading : Law of Supply ]

The law of demand states that, other things being equal,

• More of a good will be bought the lower its price
• Less of a good will be bought the higher its price

Ceteris paribus means “other things being equal.”

What Is Demand?

Demand for Goods and Services

Economists use the term demand  to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is based on needs and wants—a consumer may be able to differentiate between a need and a want, but from an economist’s perspective, they are the same thing. Demand is also based on ability to pay. If you can’t pay for it, you have no effective demand.

What a buyer pays for a unit of the specific good or service is called the  price . The total number of units purchased at that price is called the quantity demanded . A rise in the price of a good or service almost always decreases the quantity of that good or service demanded. Conversely, a fall in price will increase the quantity demanded. When the price of a gallon of gasoline goes up, for example, people look for ways to reduce their consumption by combining several errands, commuting by carpool or mass transit, or taking weekend or vacation trips closer to home. Economists call this inverse relationship between price and quantity demanded the law of demand . The law of demand assumes that all other variables that affect demand are held constant.

An example from the market for gasoline can be shown in the form of a table or a graph. (Refer back to “Reading: Creating and Interpreting Graphs” in module 0 if you need a refresher on graphs.) A table that shows the quantity demanded at each price, such as Table 1, is called a demand schedule . Price in this case is measured in dollars per gallon of gasoline. The quantity demanded is measured in millions of gallons over some time period (for example, per day or per year) and over some geographic area (like a state or a country).

Table 1. Price and Quantity Demanded of Gasoline

A demand curve shows the relationship between price and quantity demanded on a graph like Figure 1, below, with quantity on the horizontal axis and the price per gallon on the vertical axis. Note that this is an exception to the normal rule in mathematics that the independent variable (x) goes on the horizontal axis and the dependent variable (y) goes on the vertical. Economics is different from math!

The demand schedule (Table 1) shows that as price rises, quantity demanded decreases, and vice versa. These points can then be graphed, and the line connecting them is the demand curve (shown by line D in the graph, above). The downward slope of the demand curve again illustrates the law of demand—the inverse relationship between prices and quantity demanded.

The demand schedule shown by Table 1 and the demand curve shown by the graph in Figure 1 are two ways of describing the same relationship between price and quantity demanded.

Demand curves will look somewhat different for each product. They may appear relatively steep or flat, or they may be straight or curved. Nearly all demand curves share the fundamental similarity that they slope down from left to right. In this way, demand curves embody the law of demand: As the price increases, the quantity demanded decreases, and conversely, as the price decreases, the quantity demanded increases.

Demand vs. Quantity Demanded

In economic terminology, demand is not the same as quantity demanded . When economists talk about demand, they mean the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or a demand schedule. When economists talk about quantity demanded, they mean only a certain point on the demand curve, or one quantity on the demand schedule. In short, demand refers to the curve and quantity demanded refers to the (specific) point on the curve.

Change in Demand vs. Change in Quantity Demanded

A change in price does not move the demand curve. It only shows a difference in the quantity demanded.

The demand curve will move left or right when there is an underlying change in demand at all prices.

Factors Affecting Demand

Introduction.

We defined demand as the amount of some product that a consumer is willing and able to purchase at each price . This suggests at least two factors, in addition to price, that affect demand. “Willingness to purchase” suggests a desire to buy, and it depends on what economists call tastes and preferences. If you neither need nor want something, you won’t be willing to buy it. “Ability to purchase” suggests that income is important. Professors are usually able to afford better housing and transportation than students, because they have more income. The prices of related goods can also affect demand. If you need a new car, for example, the price of a Honda may affect your demand for a Ford. Finally, the size or composition of the population can affect demand. The more children a family has, the greater their demand for clothing. The more driving-age children a family has, the greater their demand for car insurance and the less for diapers and baby formula.

These factors matter both for demand by an individual and demand by the market as a whole. Exactly how do these various factors affect demand, and how do we show the effects graphically? To answer those questions, we need the  ceteris paribus assumption.

The Ceteris Paribus Assumption

A  demand curve or a supply curve  (which we’ll cover later in this module) is a relationship between two, and only two, variables: quantity on the horizontal axis and price on the vertical axis. The assumption behind a demand curve or a supply curve is that no relevant economic factors, other than the product’s price, are changing. Economists call this assumption  ceteris paribus , a Latin phrase meaning “other things being equal.” Any given demand or supply curve is based on the ceteris paribus assumption that all else is held equal. (You’ll recall that economists use the  ceteris paribus assumption to simplify the focus of analysis.) Therefore, a demand curve or a supply curve is a relationship between two, and only two, variables when all other variables are held equal . If all else is not held equal, then the laws of supply and demand will not necessarily hold.

Ceteris paribus is typically applied when we look at how changes in price affect demand or supply, but  ceteris paribus can also be applied more generally. In the real world, demand and supply depend on more factors than just price. For example, a consumer’s demand depends on income, and a producer’s supply depends on the cost of producing the product. How can we analyze the effect on demand or supply if multiple factors are changing at the same time—say price rises and income falls? The answer is that we examine the changes one at a time, and assume that the other factors are held constant.

For example, we can say that an increase in the price reduces the amount consumers will buy (assuming income, and anything else that affects demand, is unchanged). Additionally, a decrease in income reduces the amount consumers can afford to buy (assuming price, and anything else that affects demand, is unchanged). This is what the  ceteris paribus assumption really means. In this particular case, after we analyze each factor separately, we can combine the results. The amount consumers buy falls for two reasons: first because of the higher price and second because of the lower income.

The Effect of Income on Demand

Let’s use income as an example of how factors other than price affect demand. Figure 1 shows the initial demand for automobiles as D 0 . At point Q, for example, if the price is $20,000 per car, the quantity of cars demanded is 18 million. D 0 also shows how the quantity of cars demanded would change as a result of a higher or lower price. For example, if the price of a car rose to $22,000, the quantity demanded would decrease to 17 million, at point R.

The original demand curve D 0 , like every demand curve, is based on the  ceteris paribus assumption that no other economically relevant factors change. Now imagine that the economy expands in a way that raises the incomes of many people, making cars more affordable. How will this affect demand? How can we show this graphically?

Return to Figure 1. The price of cars is still $20,000, but with higher incomes, the quantity demanded has now increased to 20 million cars, shown at point S. As a result of the higher income levels, the demand curve shifts to the right to the new demand curve D 1 , indicating an increase in demand. Table 1, below, shows clearly that this increased demand would occur at every price, not just the original one.

Now, imagine that the economy slows down so that many people lose their jobs or work fewer hours, reducing their incomes. In this case, the decrease in income would lead to a lower quantity of cars demanded at every given price, and the original demand curve D 0 would shift left to D 2 . The shift from D 0 to D 2 represents such a decrease in demand: At any given price level, the quantity demanded is now lower. In this example, a price of $20,000 means 18 million cars sold along the original demand curve, but only 14.4 million sold after demand fell.

When a demand curve shifts, it does not mean that the quantity demanded by every individual buyer changes by the same amount. In this example, not everyone would have higher or lower income and not everyone would buy or not buy an additional car. Instead, a shift in a demand curve captures a pattern for the market as a whole: Increased demand means that at every given price, the quantity demanded is higher, so that the demand curve shifts to the right from D 0 to D 1 . And, decreased demand means that at every given price, the quantity demanded is lower, so that the demand curve shifts to the left from D 0 to D 2 .

We just argued that higher income causes greater demand at every price. This is true for most goods and services. For some—luxury cars, vacations in Europe, and fine jewelry—the effect of a rise in income can be especially pronounced. A product whose demand rises when income rises, and vice versa, is called a normal good . A few exceptions to this pattern do exist, however. As incomes rise, many people will buy fewer generic-brand groceries and more name-brand groceries. They are less likely to buy used cars and more likely to buy new cars. They will be less likely to rent an apartment and more likely to own a home, and so on. A product whose demand falls when income rises, and vice versa, is called an inferior good . In other words, when income increases, the demand curve shifts to the left.

Other Factors That Shift Demand Curves

Income is not the only factor that causes a shift in demand. Other things that change demand include tastes and preferences, the composition or size of the population, the prices of related goods, and even expectations. A change in any one of the underlying factors that determine what quantity people are willing to buy at a given price will cause a shift in demand. Graphically, the new demand curve lies either to the right (an increase) or to the left (a decrease) of the original demand curve. Let’s look at these factors.

Changing Tastes or Preferences

From 1980 to 2012, the per-person consumption of chicken by Americans rose from 33 pounds per year to 81 pounds per year, and consumption of beef fell from 77 pounds per year to 57 pounds per year, according to the U.S. Department of Agriculture (USDA). Changes like these are largely due to shifts in taste, which change the quantity of a good demanded at every price: That is, they shift the demand curve for that good—rightward for chicken and leftward for beef.

Changes in the Composition of the Population

The proportion of elderly citizens in the United States population is rising. It rose from 9.8 percent in 1970 to 12.6 percent in 2000 and will be a projected (by the U.S. Census Bureau) 20 percent of the population by 2030. A society with relatively more children, like the United States in the 1960s, will have greater demand for goods and services like tricycles and day care facilities. A society with relatively more elderly persons, as the United States is projected to have by 2030, has a higher demand for nursing homes and hearing aids. Similarly, changes in the size of the population can affect the demand for housing and many other goods. Each of these changes in demand will be shown as a shift in the demand curve.

Changes in the Prices of Related Goods

The demand for a product can also be affected by changes in the prices of related goods such as substitutes or complements. A  substitute   is a good or service that can be used in place of another good or service. As electronic books, like this one, become more available, you would expect to see a decrease in demand for traditional printed books. A lower price for a substitute decreases demand for the other product. For example, in recent years as the price of tablet computers has fallen, the quantity demanded has increased (because of the law of demand). Since people are purchasing tablets, there has been a decrease in demand for laptops, which can be shown graphically as a leftward shift in the demand curve for laptops. A higher price for a substitute good has the reverse effect.

Other goods are complements for each other, meaning that the goods are often used together, because consumption of one good tends to enhance consumption of the other. Examples include breakfast cereal and milk; notebooks and pens or pencils, golf balls and golf clubs; gasoline and sport utility vehicles; and the five-way combination of bacon, lettuce, tomato, mayonnaise, and bread. If the price of golf clubs rises, since the quantity of golf clubs demanded falls (because of the law of demand), demand for a complement good like golf balls decreases, too. Similarly, a higher price for skis would shift the demand curve for a complement good like ski resort trips to the left, while a lower price for a complement has the reverse effect.

Changes in Expectations About Future Prices or Other Factors That Affect Demand

While it is clear that the price of a good affects the quantity demanded, it is also true that expectations about the future price (or expectations about tastes and preferences, income, and so on) can affect demand. For example, if people hear that a hurricane is coming, they may rush to the store to buy flashlight batteries and bottled water. If people learn that the price of a good like coffee is likely to rise in the future, they may head for the store to stock up on coffee now. These changes in demand are shown as shifts in the curve. Therefore, a  shift in demand happens when a change in some economic factor (other than the current price) causes a different quantity to be demanded at every price.

Worked Example: Shift in Demand

Shift in Demand Due to Income Increase

A shift in demand means that at any price (and at every price), the quantity demanded will be different than it was before. Following is a graphic illustration of a shift in demand due to an income increase.

Step 1 . Draw the graph of a demand curve for a normal good like pizza. Pick a price (like P 0 ). Identify the corresponding Q 0 . An example is shown in Figure 1.

Step 2 . Suppose income increases. As a result of the change, are consumers going to buy more or less pizza? The answer is more. Draw a dotted horizontal line from the chosen price, through the original quantity demanded, to the new point with the new Q 1 . Draw a dotted vertical line down to the horizontal axis and label the new Q 1 . An example is provided in Figure 2.

Step 3 . Now, shift the curve through the new point. You will see that an increase in income causes an upward (or rightward) shift in the demand curve, so that at any price, the quantities demanded will be higher, as shown in Figure 3.

Summary of Factors That Change Demand

Six factors that can shift demand curves are summarized in Figure 1, below. The direction of the arrows indicates whether the demand curve shifts represent an increase in demand or a decrease in demand. Notice that a change in the price of the good or service itself is not listed among the factors that can shift a demand curve. A change in the price of a good or service causes a movement along a specific demand curve, and it typically leads to some change in the quantity demanded, but it does not shift the demand curve.

Try It: Demand for Food Trucks

Play the simulation below multiple times to see how different choices lead to different outcomes. All simulations allow unlimited attempts so that you can gain experience applying the concepts.

Check Your Understanding

Answer the question(s) below to see how well you understand the topics covered above. This short quiz does not count toward your grade in the class, and you can retake it an unlimited number of times.

Use this quiz to check your understanding and decide whether to (1) study the previous section further or (2) move on to the next section.

The downward slope of a demand curve illustrates the pattern that as ________ decreases, ________ increases.

price : quantity demanded

• price : quantity supplied
• quantity supplied : quantity demanded

MGMT-1010: Introduction to Business Copyright © by Lumen Learning is licensed under a Creative Commons Attribution 4.0 International License , except where otherwise noted.

Introduction to Demand and Supply

Chapter objectives.

In this chapter, you will learn about:

• Demand, Supply, and Equilibrium in Markets for Goods and Services
• Shifts in Demand and Supply for Goods and Services
• Changes in Equilibrium Price and Quantity: The Four-Step Process
• Price Ceilings and Price Floors

Bring It Home

Why can we not get enough of organic foods.

Organic food is increasingly popular, not just in the United States, but worldwide. At one time, consumers had to go to specialty stores or farmers' markets to find organic produce. Now it is available in most grocery stores. In short, organic has become part of the mainstream.

Ever wonder why organic food costs more than conventional food? Why, say, does an organic Fuji apple cost $2.75 a pound, while its conventional counterpart costs $1.72 a pound? The same price relationship is true for just about every organic product on the market. If many organic foods are locally grown, would they not take less time to get to market and therefore be cheaper? What are the forces that keep those prices from coming down? Turns out those forces have quite a bit to do with this chapter’s topic: demand and supply.

An auction bidder pays thousands of dollars for a dress Whitney Houston wore. A collector spends a small fortune for a few drawings by John Lennon. People usually react to purchases like these in two ways: their jaw drops because they think these are high prices to pay for such goods or they think these are rare, desirable items and the amount paid seems right.

Visit this website to read a list of bizarre items that have been purchased for their ties to celebrities. These examples represent an interesting facet of demand and supply.

When economists talk about prices, they are less interested in making judgments than in gaining a practical understanding of what determines prices and why prices change. Consider a price most of us contend with weekly: that of a gallon of gas. Why was the average price of gasoline in the United States $3.16 per gallon in June of 2020? Why did the price for gasoline fall sharply to $2.42 per gallon by January of 2021? To explain these price movements, economists focus on the determinants of what gasoline buyers are willing to pay and what gasoline sellers are willing to accept.

As it turns out, the price of gasoline in June of any given year is nearly always higher than the price in January of that same year. Over recent decades, gasoline prices in midsummer have averaged about 10 cents per gallon more than their midwinter low. The likely reason is that people drive more in the summer, and are also willing to pay more for gas, but that does not explain how steeply gas prices fell. Other factors were at work during those 18 months, such as increases in supply and decreases in the demand for crude oil.

This chapter introduces the economic model of demand and supply—one of the most powerful models in all of economics. The discussion here begins by examining how demand and supply determine the price and the quantity sold in markets for goods and services, and how changes in demand and supply lead to changes in prices and quantities.

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7 Minutes Guide To The Law of Demand

• 🗔 February 26, 2021
• 🖉 Ritoprasad Kundu
• Dissertation Writing

The law of demand is one of the important concepts in economics. This explains how in a market allocation of resources takes place. As a result the determination of the price of goods and services also takes place with the interference of the market forces . The law of demand has an inverse relationship between the price of the commodity and the quantity demanded. The main reason behind this inverse relationship is diminishing marginal utility. Here is our 7 Minutes Guide To The Law of Demand.

Economics studies how people use limited resources to satisfy their unlimited wants. The focus of the law of demand is on the unlimited wants that arise in the economy. The law of demand focuses on the factors that cause a change in the demand of quantity consumed in the economy. Demand and supply are the market forces that operate in the economy. In the free market economy, these market forces play a crucial role in regulating the prices. 

Table of Contents

Demand – 7 Minutes Guide To The Law of Demand

Demand refers to the commodity that a buyer wants to purchase backed by purchasing power. Here the main keywords are want and purchasing power. For demand to complete in the economy only want cannot be the factor. It has to be backed by purchasing power of the commodity. Because demand will be complete if the commodity is transferred from the seller to the buyer after paying the price of that commodity. 

Demand theory in the economy is the basis of the law of demand and the demand curve. It states the relation between the customer desire and the amount of goods that are available. The main concepts of demand are desire, willingness and the price to pay for the product. All the three concepts are interconnected. Demand as a concept focuses on all the three heads. Because they are interconnected, demand will not be complete if one is missing.

As a consumer of the product the foremost important part of demand is desire for a certain product. Desire is the want that arises after seeing a product in the market. Willingness for the product is second. Because the desire is affirmative there has to be willingness to purchase the product. The third concept is very important i.e. price to pay. If the buyer does not have the purchasing power then the demand will not be complete. As a result, the demand becomes complete if all three concepts fall in line in the economy. 

Demand Curve – 7 Minutes Guide To The Law of Demand

It is the graphical representation of the relation between price of commodities and quantity demanded in the economy. The price of the commodity is marked on the Y-axis. The quantity demanded is marked on the X-axis. The graph represents the inverse relation between price and quantity demanded. 

The demand curve is downward sloping as it shows the negative relationship between price and quantity demanded.

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Law of Demand – 7 Minutes Guide To The Law of Demand

The law of demand states that when the price of the commodity increases the quantity demanded will decrease. The law of demand states the inverse relation between the two attributes in the economy. 

When the price of goods and services increase the demand for the commodity decreases. But when the price of goods and services decrease the demand for the commodity increases in the economy.  

Demand and Quantity Demanded

Change in demand refers to the shift of demand curve towards the right or left. A rightward shift of demand curve refers to the increase in demand. A leftward shift of demand curve refers to decrease in demand. Increase and decrease in demand is due to many factors in the economy. Change in demand induces the change in law of demand in the economy. Change in quantity demanded refers to change in position along the demand curve. With increase or decrease in price the quantity demanded along the demand curve changes. 

This induces the law of demand also. The law of demand states that when price increases the quantity demanded decreases. And when price decreases the quantity demanded decreases. In this case the change is marked along the demand curve. Demand curve is downward sloping. The reason being the negative or the inverse relationship between price and quantity demanded. As the law of demand states now let us see the reason or the factors that affect the demand in the economy. 

Elasticity of Demand – 7 Minutes Guide To The Law of Demand

The elasticity of demand is an important concept in economics . Elasticity of law of demand can be classified into elastic demand, inelastic demand and unitary demand. 

Elastic Demand

Elastic demand refers to when the change in quantity demanded is more than the change in price level in the market. With a small change in price in the economy the quantity demanded change is more. Consumer durable goods have elastic demand. The examples of consumer durables are fridge, washing machines etc. If the price increases for these products then the demand to purchase them will postpone. 

Close substitutes goods also affect the elasticity of demand. If the price increases for a product then the consumer will shift to another commodity in the market. 

Inelastic Demand

Inelastic demand refers to when the price change of the commodity in the market is higher than the change in quantity demanded. Quantity demanded of the commodity does not change much as compared to the price of the commodity. An example of inelastic demand is that of food grains. If the prices of food grains increase then the demand for the same will not decrease. The consumption of food remains the same irrespective of the rise in price. 

Unitary Elastic Demand

When the elasticity of demand is equal to one then the demand curve is unitary elastic. In this case, the change in price and change in quantity demanded is the same. An example of unitary elastic demand is digital cameras. When the price of a digital camera decreases by 10% then the quantity demanded of the same increases by 10% in the economy.

Factors affecting Law of Demand

Demand for a commodity in the market depends upon many factors. Price, income , prices of related goods all affect the law of demand in some way or the other.

Price – 7 Minutes Guide To The Law of Demand

The price of a product affects the demand for the commodity in the market. When the price of a product is high then the quantity demanded will be low. As a result, there will be a shift along the demand curve. When the price of a product is low then the quantity demanded will be high. In this case, too there will be a shift along the demand curve. The law of demand also states that when price increases the quantity demanded declines. 

Income – 7 Minutes Guide To The Law of Demand

Income of a consumer also changes the level of demand in the economy. When the income of the consumer rises then the demand for goods and services in the economy increases. This will shift the demand curve rightwards indicating that the demand has increased. When the income level of the consumer decreases then the demand for commodities decreases. The demand curve shifts leftwards indicating that the demand for goods and services have decreased.

Price of Related Goods – 7 Minutes Guide To The Law of Demand

Prices of related goods affect demand in a drastic way. Related goods can be substitute goods or complementary goods. When prices of certain goods change it affects the demand for other goods as well. 

In the case of substitute goods, if the price of a commodity increases, the demand for the substitute good will increase. For example tea and coffee are substitute goods. When the price of tea increases then the demand for coffee in the market will rise. Because the price of tea is higher than the price of coffee.         

In the case of complementary goods, the demand for the product will depend on the prices of the commodity. For example, cars and petrol are two complementary goods. If prices of petrol increase the demand for cars will decrease.  

Taste and Preference – 7 Minutes Guide To The Law of Demand

The taste and preference of the customers related to the choice of goods matter in the economy. The taste and preference for a product is a personal affair. As a result it depends on the psyche of the person. Taste and preference changes from time to time. If the preference for a product changes then the demand for that quantity will increase or decrease. Preference for a product depends on various factors like price of the commodity or the income of the person. If the price increases then the customer will prefer another product. If the income of the consumer increases then he will prefer luxury goods rather than inferior goods.   

Expectations in change of price

Another factor that affects the law of demand is the expectation of rise in price of the product. A consumer will increase the demand for the product if he expects the price of the commodity to rise. This fluctuation in demand in the market will automatically cause a rise in price level due to the interaction of the market forces. 

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Causes of Law of Demand – 7 Minutes Guide To The Law of Demand

The inverse relationship between price and quantity demanded of that commodity causes the demand curve to slope downwards from left to right. The reasons behind law of demand are

Law of Diminishing Marginal Utility

The law of diminishing marginal utility states that when more and more units of a commodity is consumed the utility that is derived from the consumption of the successive units decreases. Therefore you can say that the law of demand depends upon the utility. If the level of satisfaction of the user is high then the demand for the product  will be high. But since the price of the commodity remains constant the consumer will not be willing to pay the same price . As a result when the price of the product decreases the buyer will tend to purchase more of the product. The basic operation behind law of demand is that of diminishing marginal utility.

Substitution Effect

The substitution effect is substituting a product in place of another when the price of the product falls. When the price of a substitute commodity increase then the customer will prefer the given commodity as it is relatively cheaper. The example of a substitute commodity is tea and coffee. When the price of coffee increases then the demand for tea will increase. Because it is relatively cheaper as compared to coffee.

Income Effect

It refers to the effect on demand of a commodity when real income of the customer changes due to the change in price level. If the price of the commodity decreases then the purchasing power of the customer will increase. Purchasing power is the income effect.

Additional Customers

When the price of goods and services decrease there will be an addition to the total base of the customer. As a result, the number of customers in the market who want to buy the product will increase. Because there is a decrease in the price level of the product. As a result, old customers who were demanding the product will also increase their demand/purchase of the product due to the low price.   

Exceptions to the law of demand – 7 Minutes Guide To The Law of Demand

As the law of demand states that when the price of a commodity increases the demand for the commodity will decrease. But there are certain exceptions to the rule in certain cases. As a result in these cases the law of demand does not work efficiently. Because with change in price or income of the consumer the demand for these goods will decrease, increase or there will be no change.

Necessary Goods

Necessary goods are those goods that are consumed daily or it is used for daily household purpose. Salt is the best example of necessary goods in the economy. In this case if the income of the consumer increases then the quantity demanded of salt will remain the same. At the same time if the price of salt increases then also the quantity demanded will remain the same. Therefore in the case for necessary goods the price or income of the customer does not affect the demand for the product. It will remain the same. 

Giffen Goods

Giffen goods are the inferior goods in the economy. In case for inferior goods the price or income of the customer does not matter. If the price of the inferior goods rise then there will be no effect on the quantity demanded of the commodities. At the same time, when prices of inferior goods decrease the effect on quantity demanded will remain the same. 

When income of the consumer increases then the quantity demanded of the commodity will decrease. The law of demand in this case does not hold true. As a result with increased income the demand for these products decrease. 

Veblen Goods

Economist Thorstein Veblen gave the concept of Veblen goods in the economy. This concept works on the principle of conspicuous consumption. In these cases as the prices of goods increase the demand for the commodities will also increase. Gold is an example of Veblen goods. In the market when the price of gold increases then the market demand of gold will also increase. The law of demand does not function in cases of Veblen goods.

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Conclusion – 7 Minutes Guide To The Law of Demand

Demand is the want for a product backed by the purchasing power. When price changes there is a change in quantity demanded also. Law of demand states that when the price of a product decreases the quantity demanded increases. In the market economy, the prices of goods and services are decided by the market forces. Income, price affect the law of demand. As a result, any change in the factors will cause the demand to change. At the same time, there are exceptions to the law of demand too. 

Law of demand is caused by the substitution effect, income effect and other factors. As a result due to the law of demand, the demand curve is downward sloping. Demand is a broad concept overall. And demand forms a major market force in the economy.

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• Law of Demand

An Introduction to Law Demand

Demand is a vital economic concept that works both at the market level and personal level. It also includes several concepts like law of demand, factors affecting it and eventually the impact of it on the economy at large. Therefore, it is essential for students to get this concept right from the very beginning as it will help to interpret the importance of the law of demand in economics. 

However, to make things easier, learners need to delve into the core of this topic to score well. 

What is the Law of Demand in Economics?

The law of demand in economics explains that when other factors remain constant, the quantity demand and price of any product or service show an inverse equation. It also means that whenever the value of a specific product increases, demand for the same declines; the exact opposite can also be observed. From this comes a concept of a demanding schedule. 

Demand Schedule

This graphical representation shows that different quantities of product are demanded at varying prices. It thus calls for a law of demand graph to explain elaborately. 

Analysis of Law of Demand 

In order to run a business in a competitive market, it is essential to understand the law of demand definition economics. This law effectively indicates consumer choice behavior. Moreover, there is a dedicated graph that shows this relationship and helps economists to take economic measures accordingly. 

This concept is based on a natural customer choice behavior. As a matter of fact, when the price of any good or service rises, demand for the same tends to fall as the consumers will not spend extra money on something than its standard price and will look for cheaper alternatives. 

Moreover, often this question comes up in examinations like “explain law of demand with diagrams”. Therefore, it will be wiser to prepare the question beforehand to answer accurately. 

(Image will be Uploaded Soon)

The above diagram contains a law of demand curve that is always downward sloping. It clearly shows that when the price increases from p2 to p1, the necessitated quantity decreases from Q2 to Q1. 

Similarly, the law of demand in economics is an interesting chapter that also includes some related sub-topics like exceptions of this law and so on. 

Let’s discuss!

Law of demand exceptions .

In a few cases, the law of demand in economics does not follow the rule. For instance, often it happens that the demand for a particular product rises along with the price. Therefore, it is vital to know about the exceptions as well to comprehend the law better and understand real-life incidents. 

For a good of prestige, the demand almost remains the same even if the price increases. 

Similarly, for necessary commodities as well, the demand rises due to its increasing consumption, despite the price rise. 

This applies as well in the case of Giffen goods. 

These are some of the certain scenarios where the law deviates from its standard rendition. 

Thus, to learn more about the law of demand in economics, download the Vedantu App and read vital notes on this topic. Moreover, they also offer various problems on this topic so that you can get a better grip on Economics. 

Factors Affecting Demand

Several factors can influence the shape and position of the demand curve. Rising income tends to raise demand for common economic commodities since individuals are more eager to spend. The availability of close alternative items that compete with particular economic goodwill tends to reduce demand for that good since they can satisfy the same types of consumer wants and needs. Availability of closely complementary products, on the other hand, will tend to raise demand for an economic item, because combining two goods might be even more useful to consumers than utilising them individually. Other variables that vary the pattern of customer preferences for how the product may be utilized and how urgently it is needed, such as future expectations, changes in background environmental circumstances, or changes in the actual or perceived quality of a good, might shift the demand curve.

Importance of Law of Demand

Price Determination - The study of law of demand is helpful for a trader to fox up the price of a commodity. He understands how much demand will decline if the price of the commodity rises to a certain level, and how much demand will grow if the price of the commodity falls. The market demand schedule can offer information on overall market demand at various prices. It helps management in determining how much of a price rise or drop in a commodity is beneficial. 

Importance to the Farmers - Farmers' economic situation is affected by whether they have a good or bad crop. If a good crop fails to generate demand, the crop's price will drop drastically. The farmer will not benefit from a successful harvest, and vice versa.

Importance to the Government - Governments evaluate the law of demand when deciding whether or not to impose additional taxes or tariffs on products, particularly when the amount demanded is not strongly influenced by price.

Major Facts about Law of Demand

It expresses the inverse relationship between demand and price. It basically states that an increase in price will cause a decrease in the amount requested, whereas a decrease in price would cause a rise in quantity demanded. 

It simply makes a qualitative statement, indicating the direction of change in the quantity requested but not the magnitude of change. 

It does not demonstrate a proportionate link between price changes and subsequent demand changes. If a price increases by 10%, the quantity demanded may decrease in any proportion.  

The law of demand is one-sided since it only explains how price changes affect the amount required. It makes no mention of the impact of changes in demand on the price of the item.

Difference between Demand and Quantity Demanded

It is critical in economic theory to distinguish between the concept of demand and the amount demanded. The term "demand" in the chart refers to the green line that runs through A, B, and C. It expresses the link between the urgency of consumer desires and the quantity of the economic item available. A shift in demand shows that this curve's position or shape has changed; it represents a movement in the underlying pattern of consumer desires and requirements in relation to the resources available to satisfy them.

The term "quantity demanded," on the other hand, refers to a point on the horizontal axis. Variations in the quantity demanded are only due to price changes and do not indicate any shift in customer preferences. Changes in quantity demanded simply refer to movement along the demand curve as a result of a price adjustment. These two concepts are sometimes confused, but this is a common misunderstanding: prices do not reduce or raise demand; rather, they alter the amount required.

Relationship between Supply and Demand

The law of supply and demand asserts that the price of a product or service will vary depending on the amount sold by the supplier and the demand from consumers. Therefore, if a product is costly, the seller will ramp up manufacturing. However, If the price is extremely high, buyers will likely buy less of it, resulting in lower demand.

FAQs on Law of Demand

1. What are the types of Demand? 

Demand in Economics refers to the number of consumers who are willing to purchase a product or service in a given period. There are generally 7 types of demand. A) Joint Demand, B) Composite Demand, C) Long-run and Short-run Demand, D) Income Demand, E) Price Demand, F) Competitive Demand and G) Direct and Derived Demand. 

Nevertheless, irrespective of the type of demand, it is intermingled with Supply. Both demand and supply determine the price of a particular product or service available in the market. 

2. What is the relationship between Demand and Supply? 

Demand and Supply are closely connected. In simple words, when the Supply of a particular good or service exceeds the demand, the price of the same falls. On the other hand, while this demand surpasses Supply, the price rises. 

Hence, Supply and price are inversely proportional when demand remains unchanged. Several economic theories work in line with this fundamental theory. 

3. What is the Demand Curve? 

The demand for a particular product mainly depends on its price and other factors such as preferences and income of consumers, the price of other products, etc. Moreover, in Economics, except the price, other factors are considered as fixed. Therefore, a curve is drawn on the basis of quantity and price that is known as a demand curve and the law associated with it is called the law of demand curve.  

The vertical axis represents price, whereas the horizontal axis represents quantity. This curve is always downward sloping. 

4. Where can I get useful study material for various concepts of Economics?

Vedantu's website or app makes it simple for students to get all of the essential Commerce Study Material. These solutions provide you with precise, clear, and error-free answers to all of your business problems. Textbooks, Solution Papers, and Notes may all be used to help you read more fully and improve your test preparation. When students struggle to understand the foundations of economics, they frequently memorise their courses; nevertheless, in secondary school, mugging up is not an option. The best way to study for tests is to understand the fundamentals of each chapter. That is why Vedantu offers up-to-date study materials for students to help them grasp the fundamentals of each subject. These resources are accessible for free on the Vedantu app as well. Vedantu's app works on smartphones and other mobile devices.

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Unit 2: Supply, demand, and market equilibrium

About this unit.

Economists define a market as any interaction between a buyer and a seller. How do economists study markets, and how is a market influenced by changes to the supply of goods that are available, or to changes in the demand that buyers have for certain types of goods?

• Law of demand (Opens a modal)
• Market demand as the sum of individual demand (Opens a modal)
• Substitution and income effects and the law of demand (Opens a modal)
• Price of related products and demand (Opens a modal)
• Change in expected future prices and demand (Opens a modal)
• Changes in income, population, or preferences (Opens a modal)
• Normal and inferior goods (Opens a modal)
• Inferior goods clarification (Opens a modal)
• What factors change demand? (Opens a modal)
• Lesson summary: Demand and the determinants of demand (Opens a modal)
• Demand and the law of demand Get 5 of 7 questions to level up!
• Law of supply (Opens a modal)
• Change in supply versus change in quantity supplied (Opens a modal)
• Factors affecting supply (Opens a modal)
• What factors change supply? (Opens a modal)
• Lesson summary: Supply and its determinants (Opens a modal)
• Supply and the law of supply Get 3 of 4 questions to level up!

Market equilibrium and changes in equilibrium

• Market equilibrium (Opens a modal)
• Changes in market equilibrium (Opens a modal)
• Changes in equilibrium price and quantity when supply and demand change (Opens a modal)
• Changes in equilibrium price and quantity: the four-step process (Opens a modal)
• Lesson summary: Market equilibrium, disequilibrium, and changes in equilibrium (Opens a modal)
• Market equilibrium and disequilibrium Get 3 of 4 questions to level up!
• Changes in equilibrium Get 3 of 4 questions to level up!

• Law Of Demand And Elasticity Of Demand

Now that we are familiar with the concept of demand and the determinants of demand, let us study about another important concept – the elasticity of demand. We will be studying the meaning and the types of demand elasticity. Let’s get started.

• Elasticity of Demand

(Source: ShutterStock)

The elasticity of demand is an economic term. It refers to demand sensitivity. In other words, it helps to understand how the demand for good changes is when there are changes in other economic variables. These economic variables include factors such as prices and consumer income.

Demand elasticity is calculated as the percent change in the quantity demanded divided by a percent change in another economic variable.  A higher value for the demand elasticity with respect to an economic variable means that consumers are more sensitive to changes in this variable.

The elasticity of demand = (% Change in demanded quantity)/(% Change in another economic variable)

Browse more Topics under Theory Of Demand

• Meaning And Determinants Of Demand
• Exceptions to the Law of Demand
• Movement along the Demand Curve and Shift of the Demand Curve
• Price Elasticity of Demand
• Income Elasticity of Demand
• Cross Elasticity of Demand
• Demand Forecasting
• Methods of Demand Forecasting

Types of Demand Elasticity

Let us take a look at the types of demand elasticity. There are broadly three types of demand elasticity.

1] Price Elasticity of Demand

This refers to the change or sensitivity in the customer’s demand for the quantity of a good with respect to a change in its price. Companies often collect this data on the consumer response to price changes. This helps them adjust the price to maximize profits.

2] Income Elasticity of Demand

This is the responsiveness of demand for a product with respect to the change in income. So it will help measure the increase or decrease in demand when the income of the consumer increases or decreases.

3] Cross Elasticity of Demand

This value is calculated by using the percent change in demanded quantity for a good and dividing it by the percent change in the price of some other good. Moreover, this indicates the consumer reaction to demand a particular good in accordance with price changes of other goods.

Demand elasticity is generally measured in absolute terms. This implies the sign of the variable is ignored. If the value is greater than 1, it is elastic. Furthermore, this implies demand is responsive to economic changes (like price). If the value is less than 1 is inelastic.

This further implies demand does not show change according to economic changes such as price. Demand is unit elastic when its value is equal to 1. This implies the value of demand moves proportionately with economic changes.

Law of Demand

Economists use the term demand as a reference to the quantity of a good or service that a consumer is willing and has the ability to purchase at a price. Demand is based on needs and the ability to pay. Ability to pay is important as in its absence the demand becomes ineffective.

The law of demand states that if all other factors remain constant, then the price and the demanded quantity of any good and service are inversely related to one another. This implies that if the price of an article increases then its corresponding demand decreases. Similarly, if the price of an article decreases then its demand should increase accordingly.

The price of the good and its price are plotted to form the demand curve.  The demand quantity at a particular price can be calculated from the demand curve. This price and value relation is represented in a table known as the demand schedule.

Solved Question for You

Q: What is Ceteris Paribus?

Ans: It is important to take into account the assumptions made while constructing the law of demand. A primary assumption is ‘Ceteris paribus’. This implies that everything aside from price remains constant and no change in any other economic variable. Furthermore, the change in the demanded quantity is only due to a change in prices.

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• Accountancy
• Business Studies
• Organisational Behaviour
• Human Resource Management
• Entrepreneurship
• CBSE Class 11 Microeconomics Notes

Chapter 1: Introduction

• Introduction to Microeconomics
• Microeconomics and Macroeconomics: Meaning, Scope, and Interdependence
• Difference between Microeconomics and Macroeconomics
• Economic Problem & Its Causes
• Central Problems of an Economy
• Opportunity Cost : Definition, Types, Formula & Examples
• Production Possibilities Curve (PPC) : Meaning, Assumptions, Properties and Example

Chapter 2: Consumer's Equilibrium

• Theory of Consumer Behaviour
• Difference between Needs and Wants
• Utility Analysis : Total Utility and Marginal Utility
• Law of Diminishing Marginal Utility (DMU) : Meaning, Assumptions & Example
• Consumer's Equilibrium in case of Single and Two Commodity
• Indifference Curve : Meaning, Assumptions & Properties
• Budget Line: Meaning, Properties, and Example
• Difference between Budget Line and Budget Set
• Shift in Budget Line
• Consumer’s Equilibrium by Indifference Curve Analysis

Chapter 3: Demand

• Theory and Determinants of Demand
• Individual and Market Demand
• Difference between Individual Demand and Market Demand
• What is Demand Function and Demand Schedule?

Law of Demand

• Movement along Demand Curve and Shift in Demand Curve
• Difference between Expansion in Demand and Increase in Demand
• Difference between Contraction in Demand and Decrease in Demand
• Substitute Goods and Complementary Goods
• Difference between Substitute Goods and Complementary Goods
• Normal Goods and Inferior Goods
• Difference between Normal Goods and Inferior Goods
• Types of Demand
• Substitution and Income Effect
• Difference between Substitution Effect and Income Effect
• Difference between Normal Goods, Inferior Goods, and Giffen Goods

Chapter 4: Elasticity of Demand

• Price Elasticity of Demand: Meaning, Types, Calculation and Factors Affecting Price Elasticity
• Methods of Measuring Price Elasticity of Demand: Percentage and Geometric Method
• Difference between Elastic and Inelastic Demand
• Relationship between Price Elasticity of Demand and Total Expenditure

Chapter 5: Production Function: Returns to a Factor

• Production Function: Meaning, Features, and Types
• What is TP, AP and MP? Explain with examples.
• Law of Variable Proportion: Meaning, Assumptions, Phases and Reasons for Variable Proportions
• Relationship between TP, MP, and AP
• Law of Returns to Scale: Meaning and Stages
• Difference between Returns to Factor and Returns to Scale

Chapter 6: Concepts of Cost and Revenue

• What is Cost Function?
• Difference between Explicit Cost and Implicit Cost
• Types of Cost
• What is Total Cost ? | Formula, Example and Graph
• What is Average Cost ? | Formula, Example and Graph
• What is Marginal Cost ? | Formula, Example and Graph
• Variable Cost: Meaning, Formula, Types and Importance
• Interrelation between Costs
• Concepts of Revenue| Total Revenue, Average Revenue and Marginal Revenue
• Relationship between Revenues (AR, MR and TR)
• Break-even Analysis: Importance, Uses, Components and Calculation
• What is Break-even Point and Shut-down Point?

Chapter 7: Producer’s Equilibrium

• Producer's Equilibrium: Meaning, Assumptions, and Determination

Chapter 8: Theory of Supply

• Theory of Supply: Characteristics and Determinants of Individual and Market Supply
• Difference between Stock and Supply
• Law of Supply: Meaning, Assumptions, Reason and Exceptions
• Changes in Quantity Supplied and Change in Supply
• Difference between Movement Along Supple Curve and Shift in Supply Curve
• Difference between Change in Quantity Supplied and Change in Supply
• Difference Between Expansion of Supply and Increase in Supply
• Difference between Contraction of Supply and Decrease in Supply
• Price Elasticity of Supply : Type, Determinants and Methods
• Types of Elasticity of Supply

Chapter 9: Forms of Market

• Market : Characteristics & Classification
• Perfect Competition Market: Meaning, Features and Revenue Curves
• Monopoly Market: Features, Revenue Curves and Causes of Emergence
• Monopolistic Competition: Characteristics & Demand Curve
• Oligopoly Market : Types and Features
• Difference between Perfect Competition and Monopoly
• Difference between Perfect Competition and Monopolistic Competition
• Difference between Monopoly and Monopolistic Competition
• Distinction between the four Forms of Market(Perfect Competition, Monopoly, Monopolistic Competition and Oligopoly)
• Long-Run Equilibrium under Perfect, Monopolistic, and Monopoly Market
• Profit Maximization : Meaning, Elements, Conditions and Formula
• Profit Maximization in Perfect Competition Market
• Profit Maximization in Monopoly Market

Chapter 10: Market Equilibrium under Perfect Competition

• Determination of Market Equilibrium under Perfect Competition
• Effects of Changes in Demand and Supply on Market Equilibrium
• Price Ceiling and Price Floor or Minimum Support Price (MSP): Simple Applications of Supply and Demand
• Difference between Price Ceiling and Price Floor
• Important Formulas in Microeconomics | Class 11

Law of Demand states that there is an inverse relationship between the price and quantity demanded of a commodity , keeping other factors constant or ceteris paribus. It is also known as the First Law of Purchase .

There are several other factors besides the price of the given commodity that affect the quantity demanded of a commodity. Therefore, in order to understand the separate influence of one factor affecting the demand, it is essential that the other factors are kept constant. Hence, under the Law of Demand, it is assumed that other factors are constant. 

Points to Remember: The Law of Demand states that, everything else being constant, the quantity demanded of a good or service decreases as its price increases, and vice versa. The demand curve typically slopes downward from left to right , illustrating the negative correlation between price and quantity demanded. The Law of Demand applies both at the individual consumer level and across the entire market . The Law of Demand is often linked to the concept of diminishing marginal utility , which suggests that as consumers consume more units of a good, the additional satisfaction derived from each additional unit decreases.

Table of Content

Assumptions of Law of Demand

Graphical presentation of law of demand.

• Facts about Law of Demand

Derivation of Law of Demand

Reasons for law of demand, exceptions to law of demand, the assumptions on which the law of demand is based are as follows:.

• The price of substitute goods does not change.
• The price of complementary goods also remains constant.
• The income of the consumer does not change. 
• Tastes and preferences of the consumers remain the same.
• People do not expect the future price of the commodity to change. 

Let’s take an example to understand the concept of the Law of Demand better. 

The above table clearly shows that as the price of the commodity decreases, its quantity demanded increases. Also, the demand curve DD is sloping downwards from left to right, which means that there is an inverse relationship between the price and quantity demanded of the commodity. 

Facts about Law of Dem and

1. one-side.

As the Law of Demand only talks about the effect of change in price on the change in quantity demanded of a commodity and not about the effect of change in quantity demanded of a commodity on the change in its price, it is one-sided. 

2. Inverse Relationship

The Law of Demand also states that there is an inverse relationship between the price and quantity demanded of a commodity. It means that if the price of a commodity rises, then the quantity demanded will fall, and if the price reduces, then the quantity demanded will increase. 

3. Qualitative, not Quantitative

The Law of Demand makes only a qualitative statement and not a quantitative statement. In other words, it only shows the direction of change in the quantity demanded and not the magnitude of change. 

4. No Proportional Relationship

The Law of Demand does not indicate any proportional relationship between the change in the price of a commodity and the change in its demand. It means that if the price of a commodity falls by 10%, the rise in demand can be 20%, 30%, or any other proportion. 

According to the Law of Demand, while keeping other factors constant, there is an inverse relationship between the demand and price of a commodity. It means that the demand for a commodity falls or increases with a rise or fall in its price, respectively. The inverse relationship between the price and demand for a commodity can be derived by:

• Marginal Utility = Price Condition
• Law of Equi-Marginal Utility

1. Marginal Utility = Price Condition or Single Commodity Equilibrium Condition

According to this condition, a consumer buys only that much quantity of a commodity at which its Marginal Utility is equal to the Price. However, the Marginal Utility of a commodity can be more or less than its Price.

When Marginal Utility is less than the price of a commodity (MU<Price): The Marginal Utility of a commodity is less than the price when the price of the commodity increases. A rise in the price of the commodity discourages the consumer to purchase more of it, showing that a rise in the price of a good decreases its demand. The consumer in this buy will reduce the demand of the commodity until the Marginal Utility becomes equal to the price again. 

When Marginal Utility is more than the price of a commodity (MU>Price):   The Marginal Utility of a commodity is greater than the price when the price of the commodity falls. A fall in the price of the commodity encourages the consumer to purchase more of it, showing that a fall in the price of a good increases its demand. The consumer in this case will buy the commodity until the Marginal Utility falls and becomes equal to the price again. 

Hence, it can be concluded that the demand for a commodity increases when its price falls, and vice-versa, i.e., there is an inverse relationship between the demand and price of a commodity.  

2. Law of Equi-Marginal Utility

According to the law of equi-marginal utility, a consumer will be at equilibrium when he spends his limited income in a way that the ratios of the Marginal Utilities and the respective prices of the commodities are equal. The Marginal Utility falls as the consumption of the commodity increases. 

In the case of two commodities, say X and Y, the equilibrium condition will be:

[Tex]\frac{MU_X}{P_X}=\frac{MU_Y}{P_Y}[/Tex]

Now, the effect of rise or fall in the price of the commodity on the equilibrium condition can be as follows:

When the price of Commodity X rises: If the price of commodity X increases, then [Tex]\frac{MU_x}{P_x}<\frac{MU_y}{P_y}[/Tex] . It means that because of a rise in the price, the consumer is getting more Marginal Utility from Good Y as compared to Good X. So, he/she will buy more of Good Y and less of Good X, showing that the demand for Good X will reduce due to an increase in its price. 

When the price of Commodity X falls: If the price of commodity X falls, then [Tex]\frac{MU_x}{P_x}>\frac{MU_y}{P_y}[/Tex] . It means that because of a fall in the price, the consumer is getting more Marginal Utility from Good X as compared to Good Y. So, he/she will buy more of Good X and less of Good Y, showing that the demand for Good X will rise due to a fall in its price. 

Also Read: Theory and Determinants of Demand Individual and Market Demand Difference between Individual Demand and Market Demand

A consumer buys more of a commodity when its price is lower than a higher price because of the following reasons:

1. Law of Diminishing Marginal Utility : The Law of Diminishing Marginal Utility states that as more and more units of a commodity is consumed, the utility derived by the consumer from each successive unit keeps decreasing. It means that the demand for a commodity depends on its utility.

Therefore, if a consumer gets more satisfaction from a commodity, he/she will pay more for it because of which the consumer will not be prepared to pay the same price for extra units of that commodity. Hence, the consumer will buy more of the commodity only when its price falls. 

2. Substitution Effect : Substituting one commodity in place of another commodity when the former becomes relatively cheaper is known as the substitution effect . In other words, when the price of a commodity (let’s say coffee) falls, it becomes relatively cheaper than its substitute (let’s say tea), assuming that the price of the substitute (tea) does not change because of which the demand for the given commodity (coffee) increases. 

3. Income Effect : When the real income of the consumer changes because of the change in the price of the given commodity, there is an effect on its demand. This effect on demand is known as Income Effect. In other words, when there is a fall in the price of the given commodity, it increases the purchasing power of the consumer, resulting in an increase in the ability of the consumer to buy more of it.

For example, suppose Sayeba’s pocket money is ₹100, and she buys 10 ice-creams for ₹10 each from it. Now, if the price of the ice cream falls to ₹5 each, it will increase her purchasing power, and she can buy 20 ice-creams from her pocket money. 

Price Effect is the combined effect of Income Effect and Substitution Effect (Price Effect = Substitution Effect + Income Effect) . 

4. Additional Customers: When the price of a commodity falls, various new customers who could not purchase the commodity earlier due to its high price are now in a position to buy it. Besides new customers, the existing or old customers of the commodity will also start demanding more of the commodity because of the fall in price.

For example, if the price of pizza falls from ₹200 to ₹150, then many new customers who were not in a position to afford it earlier can now purchase it because of the fall in price. Also, the existing customers can now demand more pizza, resulting in an increase in its total demand.

5: Different Uses: Some commodities have different uses, among which some of them are more important, and the rest are less important. When the price of such commodities increases, consumers restrict its use to the most important purposes, increasing its demand for those purposes, and the demand for less important uses of the commodity gets reduced. However, when the price of the commodity reduces, consumers will use it for every purpose, whether it is important or not.

For example, Milk has various uses such as for drinking, making cheese, butter, sweets, etc. If the price of Ghee increases, then the consumers will restrict their use to the important purpose of drinking.

Also Read: What is Demand Function and Demand Schedule? Types of Demand

1. Giffen Goods : The special kind of inferior goods on which the consumers spend a big part of their income are known as Giffen Goods. The demand for these goods increases with an increase in price and falls with a decrease in price. This phenomenon was initially observed by Sir Robert Giffen and is popularly known as Giffen’s Paradox .

For example, rice is an inferior good and wheat is a normal good. Hence, if the price of rice falls, the consumer will spend less on rice and will start buying more wheat.

2. Fear of Shortage: If the consumers expect that a commodity will become scarce in the near future, they will start buying more of it in the present, even if the price of the commodity rises because of the fear of its shortage and rise in its price in the future.

For example, in the initial period of COVID, consumers demanded more of the necessity goods like wheat, pulses, etc., even at a higher price due to their fear of general insecurity and shortage in the near future. 

3. Status Symbol or Goods of Ostentation: Another exception to the law of demand is the goods that are used as status symbols by the people.

For example, people buy goods like antique paintings because of the status symbol they want to maintain. They demand antique paintings only because their price is high. It means that if the price of antique paintings reduces, then the consumers will no longer see it as a status symbol and will reduce its demand. 

4. Ignorance: Sometimes consumers are unaware of the prevailing price of a good in the market . In such cases, they buy more of a commodity, even at a higher price. 

5. Necessities of Life: The commodities which are necessary for human life have more demand no matter whether their price reduces or increases. For example, demand for necessity goods like medicines, pulses, wheat, etc., will increase, even if their price increases.

6. Change in Weather: When there is a change in the weather, demand for some goods changes, even if their price increases. For example, demand for raincoats in the rainy season increases, even if their price increases.

7. Fashion-related goods:   The goods related to fashion are demanded more, even when their price is high. For example, if a specific model of Mobile Phone is in fashion, then consumers will buy it, even if its price increases. 

Also Read: Theory and Determinants of Demand Individual and Market Demand Types of Demand What is Demand Function and Demand Schedule?

Law of Demand – FAQs

What are the four types of demand.

1. Price Demand: The quantity of a good or service that consumers are willing and able to buy at various prices, holding other factors constant. 2. Income Demand: The quantity of a good or service that consumers are willing to buy based on their income levels. 3. Cross Demand: The quantity of a good that consumers demand based on the price changes of related goods (substitutes and complements). 4. Market Demand: The total quantity of a good or service that all consumers in a market are willing and able to buy at various prices.

What is the first Law of Demand?

The first law of demand states that , all else being equal, as the price of a good or service decreases, the quantity demanded increases, and as the price increases, the quantity demanded decreases.

Why is it called the Law of Demand?

It is called the law of demand as it describes a fundamental and consistent relationship observed in markets: the inverse relationship between price and quantity demanded.

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