Law of demand is the economic law that determines the quantity demanded of goods in dependence of its prices and other influential factors.
The demand represents the quantity of goods that a consumer is willing to buy for each price level, keeping constant the other variables that influence it.
Factors that Determine Demand
- Goods’ Price: Increasing the price of goods decrease the quantity demanded and vice versa.
- Substitute Goods’ Price (Goods that can satisfy the need of the consumer, eg margarine and butter.): If the price of substitute goods rise, the demand for the goods increase and vice versa.
- Complementary Goods’ Price: (Goods that are consumed together, eg tennis racket and tennis ball, cars and fuels.): When the price of one good rises, the quantity demanded of other Goods that are complementary to the asset analyzed. Consider the price of gasoline increases, it could decrease the demand for cars that use gasoline, because people will prefer vehicles that use cheaper fuels.
- Consumer Income: In normal goods, as consumers’ income increases, the demand for a good will increase and vice versa. On the contrary, in the inferior goods (of lower quality), as the consumer’s income increases, the demand for the good will decrease. In luxury goods, a significant increase in consumer income increases demand and vice versa.
- Tastes and Preferences: By increasing preferences for goods (whether by fashion, season, etc.) demand for it will increase.
- Population: By increasing the population it is expected that the demand for a good increases as there are more consumers with the same need.
- Expected Future Prices: If the price of a good is expected to increase over time, the immediate demand for this good will increases. On the other hand, if the price is expected to decrease in the future the demand will decrease now.
What is the Law of Demand?
Economic law that determines that the quantity demanded of goods decrease as its prices increase, keeping the remaining variables constant. The quantity demanded is inversely proportional to the price.
So, the increase in the price (P) causes a decrease in the quantity demanded (Qd) and vice versa, the decrease of the price will increase the amount demanded.
More from Business Study Notes:- Law of Supply
We may also say that The Law of Demand is a negative or inverse relationship between the price of a good and the amount demanded of that good. When the price of a good increases, consumers are increasingly less willing to pay the higher price for that particular good. Although, which causes the demand for it to decline.
And the opposite happens when the price of that good decreases. In this case, at a lower price, the plaintiffs are more willing to consume that particular good, which causes the quantity demanded to increase.
We can see the Law of Demand in a more graphic and easy to understand in the following graph. Where it can be seen that if the price increases, the demand decreases and if the price decreases the demand increases. As we see the slope of the curve is negative, the result of this inverse relationship.
Therefore the Law of demand may lead one to think that if price is lowered, demand will increase, but beware of drastic price movements. It is not easy and in this equation other variables not as easily measurable as the Perceptions. So, it is understood that the price increase does not feel right between buyers, but also when a customer is paying a price for a product. Therefore, it is not easy to reduce the price suddenly unless it is included in the offer mode so that it does not have the feeling of deceit during the previous time.
Law of Demand Curve
The demand curve is the graphical representation of the relationship between quantity demanded and prices. It is a curve that shows the quantities of goods that a consumer is willing to pay and can do so, to buy different Price levels.
Hence, it has a negative slope due to the inverse relationship between prices and quantities demanded. As the price goes up, the quantity demanded decreases, while if the price goes down, it increases.
Movements in the Demand Curve
The movements along the demand curve (variation of quantity demanded) are caused by changes in the price of the given good. When prices are high, the quantities demanded are low and if prices decrease, the quantity demanded will increase.
Shifts in the Demand Curve
Shifts in the demand curve are caused by changes in the other factors that determine demand. However, except for the prices of the products itself, that is, changes in tastes, income, prices of related goods etc.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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