Law of Demand

Law of Demand
The law of demand states that, all else being equal, when the price of a
good or service decreases, the quantity demanded increases, and when
the price increases, the quantity demanded decreases. This shows an
inverse relationship between price and quantity demanded.
 Example: If the price of apples drops from $2 to $1, consumers will

likely buy more apples because they are cheaper.

Changes in Quantity Demanded (Movements along the Demand
Curve)
A change in the quantity demanded happens when there is a change in

the price of the good itself, leading to movement along the demand
curve.
 Movement down the curve (Expansion): When the price

decreases, quantity demanded increases (moving to the right on the
curve).
 Movement up the curve (Contraction): When the price

increases, quantity demanded decreases (moving to the left on the
curve).
Same diagram
Shifts in the Demand Curve (Changes in Demand)
A shift in the demand curve occurs when the quantity demanded

changes at every price level, due to factors other than the price of the
good itself. This could be caused by:
 Increase in demand: Caused by factors like higher income, a

change in tastes, or an increase in population. The demand curve
shifts to the right.
 Decrease in demand: Caused by factors like lower income, a

change in preferences, or an increase in the price of substitutes. The
demand curve shifts to the left.
Factors that Shift the Demand Curve:
 Income of consumers: Higher income can increase demand (shift

right), lower income can reduce demand (shift left).
 Prices of related goods: If the price of a substitute good rises,

demand for the original good may increase (shift right). If the price
of a complementary good rises, demand may fall (shift left).
 Tastes and preferences: A favorable change increases demand,

an unfavorable one decreases it.
 Expectations about future prices: If consumers expect prices to

rise in the future, they may demand more now (shift right).
 Number of buyers: More buyers lead to higher demand (shift

right)


Exceptions to the Law of Demand
There are a few exceptions where the law of demand does not hold:
 Giffen Goods: These are inferior goods for which an increase in price leads to an
increase in quantity demanded because higher prices may signal greater utility for
basic necessities. E.g., in some cases, a rise in the price of bread in poor areas may
lead to higher demand, as people can no longer afford more expensive alternatives.
 Veblen Goods: These are luxury goods where higher prices make the product more
desirable as a status symbol, leading to higher demand (e.g., luxury cars or designer
clothing).
 Essential Goods: In some cases, for goods essential to survival (like certain
medicines), a rise in price may not significantly reduce demand because people need
the product regardless of cost.
In conclusion,
the law of demand is a fundamental concept that explains the inverse

relationship between price and quantity demanded. Movements along the
demand curve occur due to price changes, while shifts in the curve
happen due to factors such as income or preferences. Exceptions like
Giffen and Veblen goods highlight unique cases where the law of demand
does not apply. Understanding these concepts provides insight into how
consumers react to price changes in various markets.
why demand curve slops downward?
The demand curve slopes downward due to several key factors that
explain the inverse relationship between price and quantity demanded.
Here are the main reasons:
1. Law of Diminishing Marginal Utility

As consumers purchase more of a good, the additional satisfaction (or
utility) they gain from consuming each additional unit decreases. As a
result, consumers are only willing to buy more units if the price decreases
to match the lower utility they get from additional consumption.
 Example: If you buy one slice of pizza, the first slice gives you a lot
of satisfaction. By the time you buy a third or fourth slice, the
satisfaction (or enjoyment) decreases, so you're only willing to buy
more if the price drops.
2. Income Effect
When the price of a good decreases, consumers’ real purchasing power

increases, meaning they can buy more of the good with the same amount
of money. This makes them feel "richer," and they buy more.
 Example: If the price of a bus ticket drops, you can afford more bus
rides within your budget, so you will use the bus service more
frequently.
3. Substitution Effect
When the price of a good falls, it becomes cheaper relative to other

goods. Consumers will tend to substitute the now cheaper good for other
goods that are more expensive.
 Example: If the price of tea falls while coffee remains the same,
people might buy more tea as a substitute for coffee.
4. New Buyers Enter the Market
As the price of a product decreases, it becomes affordable to a larger

group of people. This leads to more consumers entering the market, which
increases the overall quantity demanded.
 Example: A decrease in the price of smartphones might allow more

people with lower incomes to afford one, increasing the overall
demand for smartphones.

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Law of Demand

 Example: If the price of apples drops from $2 to $1, consumers will

A change in the quantity demanded happens when there is a change in

 Movement down the curve (Expansion): When the price

 Movement up the curve (Contraction): When the price

A shift in the demand curve occurs when the quantity demanded

 Increase in demand: Caused by factors like higher income, a

 Decrease in demand: Caused by factors like lower income, a

Factors that Shift the Demand Curve:

 Income of consumers: Higher income can increase demand (shift

 Prices of related goods: If the price of a substitute good rises,

 Tastes and preferences: A favorable change increases demand,

 Expectations about future prices: If consumers expect prices to

 Number of buyers: More buyers lead to higher demand (shift

Exceptions to the Law of Demand

the law of demand is a fundamental concept that explains the inverse

why demand curve slops downward?

1. Law of Diminishing Marginal Utility

When the price of a good decreases, consumers’ real purchasing power

When the price of a good falls, it becomes cheaper relative to other

4. New Buyers Enter the Market

As the price of a product decreases, it becomes affordable to a larger

 Example: A decrease in the price of smartphones might allow more

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