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Updated on 11th April, 2023 , 11 min read
The law of demand is a fundamental concept in economics that describes the relationship between the price of a product and the quantity of that product demanded by consumers. In the field of economics, demand refers to the amount of a particular good or service that a consumer is able and willing to buy at various prices within a specific time frame. It is important to note that while desire may involve wanting to buy a product, demand specifically requires both the desire and the ability to pay for it. A consumer's desire to purchase a product is not equivalent to their demand for it, as demand requires both willingness and purchasing power.
The Law of Demand also referred to as theFirst Law of Purchase, asserts that when all other factors are held constant or ceteris paribus, the price and quantity demanded of a commodity have an inverse relationship. In other words, as the price of a product increases, the quantity demanded of it will decrease, and vice versa. When the price of a product decreases, consumers are able to purchase more of that product with their limited budget, leading to an increase in demand. Conversely, when the price of a product increases, consumers are forced to purchase less of that product, leading to a decrease in demand.
The relationship between price and quantity demanded can be illustrated using a demand curve. A demand curve is a graphical representation of the relationship between the price of a product and the quantity of that product demanded by consumers. The demand curve is downward sloping, indicating that as the price of a product increases, the quantity demanded decreases, and as the price of a product decreases, the quantity demanded increases.
The demand curve can be expressed mathematically using the following equation:
Qd = a - bP
Where Qd represents the quantity demanded, P represents the price, a represents the intercept, and b represents the slope of the demand curve.
Price |
Quantity Demanded |
4 |
2 |
3 |
4 |
2 |
6 |
1 |
8 |
It is evident from the table above that a decrease in the price of the commodity leads to an increase in its quantity demanded. This relationship is reflected in the downward-sloping demand curve DD, indicating an inverse relationship between the price and quantity demanded of the commodity.
The law of demand is commonly depicted in graphical form, with the demand curve representing the relationship between the price and quantity demanded of a good.
The demand curve may take on different shapes depending on the type of good, but it typically has a concave shape. However, it is also possible to represent the demand curve as a straight line in some economics textbooks.
The demand curve is plotted with the quantity demanded on the x-axis and the price on the y-axis, reflecting the inverse relationship between the two variables as stated in the law of demand.
It is important to differentiate between the concepts of demand and quantity demanded. Quantity demanded refers to the number of goods consumers are willing to buy at a given price, while demand encompasses all possible relationships between a good's price and quantity demanded.
The law of demand has important applications in both microeconomics and macroeconomics. In microeconomics, the law of demand is used to analyze the behavior of individual consumers and firms in the market. Understanding the law of demand helps firms to set prices that maximize their profits, and it helps consumers to make purchasing decisions that maximize their utility.
In macroeconomics, the law of demand is used to analyze the behavior of the overall economy. Changes in the price of goods and services can have a significant impact on the economy, and the law of demand helps economists to understand how changes in prices affect overall demand and economic growth.
While the Law of Demand generally holds true, there are some exceptions to this economic principle. Some of the exceptions are:
The Law of Demand is an important economic principle because it helps explain how consumers respond to changes in the price of goods and services. Here are some of the key reasons why the Law of Demand is important:
The Law of Demand is a fundamental concept in economics that explains the relationship between the price and quantity demanded of a commodity. Here are some important facts about the Law of Demand:
The table below is outlining the key differences between demand and quantity demanded:
Aspect |
Demand |
Quantity Demanded |
Definition |
Refers to the consumer's desire and willingness to purchase a particular product or service at various price points, assuming all other factors are constant |
Refers to the amount of a good or service that consumers are willing and able to purchase at a particular price point |
Nature |
It is an abstract concept that represents the overall demand for a product or service across a range of prices |
It is a concrete measure that represents the number of units of a product or service that consumers are willing to buy at a particular price |
Factors affecting it |
Price, income, tastes and preferences, availability of substitutes, advertising, and other factors |
Only price influences quantity demanded while other factors remain constant |
Representation |
Shown graphically as a demand curve |
Shown graphically as a point on a demand curve at a particular price |
Elasticity |
Demand can be elastic or inelastic, depending on how responsive it is to price changes |
Quantity demanded is always elastic, meaning it can change with small changes in price |
Note that while demand and quantity demanded are related concepts, they are distinct from each other and have different implications for producers, consumers, and markets as a whole.
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:
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.
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.
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.
Hence, it can be concluded that the demand for a commodity increases when its price falls, and vice-versa. There is an inverse relationship between the demand and price of a commodity.
There are several reasons for the Law of Demand:
Supply and demand are two fundamental concepts in economics, and their relationship is essential in determining the price and quantity of goods and services in a market economy.
The law of demand states that the quantity demanded of a good or service decreases as its price increases, while the law of supply states that the quantity supplied of a good or service increases as its price increases. The point at which the demand and supply curves intersect is called the equilibrium point, where the price and quantity are stable.
When the price of a good or service is below the equilibrium point, the quantity demanded exceeds the quantity supplied, resulting in a shortage, and the price will increase until the equilibrium point is reached. On the other hand, if the price is above the equilibrium point, the quantity supplied exceeds the quantity demanded, resulting in a surplus, and the price will decrease until the equilibrium point is reached.
Therefore, supply and demand have an inverse relationship with the price, as an increase in demand will lead to a higher price and an increase in supply will lead to a lower price. The relationship between supply and demand is dynamic, and it constantly changes based on various factors such as changes in technology, consumer preferences, and government policies.
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