Law of Demand

Concept / Term

Law of Demand

Branch

Microeconomics

Definition & Explanation

Law of Demand

All other things being equal (ceteris paribus), the Law of Demand states that as the price of a good increases, the quantity demanded decreases, and vice versa. This inverse relationship is fundamental to microeconomics.

Demand Curve

The demand curve slopes downward from left to right, illustrating the inverse relationship between price and quantity demanded.
Movement along the curve occurs due to a change in the product's own price.
A shift of the curve (either left or right) occurs due to changes in other factors affecting demand, not price.

Determinants of Demand (Non-Price Factors)

These factors cause the entire demand curve to shift:

Consumer Income: For normal goods, demand rises with income; for inferior goods, demand falls as income rises.
Prices of Related Goods:
- Substitutes: Goods that can be used in place of another (e.g., tea and coffee). An increase in the price of a substitute typically increases the demand for the original good.
- Complements: Goods that are consumed together (e.g., cars and petrol). An increase in the price of a complement typically decreases the demand for the original good.
Consumer Preferences/Tastes: Changes in consumer preferences can increase or decrease demand.
Expectations: Consumers' expectations about future prices or income can affect current demand.
Number of Buyers: An increase in the number of buyers in the market will generally increase overall demand.

Exceptions to the Law of Demand

Giffen Goods: A rare type of inferior good for which demand increases as its price increases. This paradox occurs when the income effect outweighs the substitution effect, typically for staple goods consumed by very poor individuals.
Veblen Goods: Luxury goods whose demand increases as their price increases, often due to their status symbol appeal (e.g., high-end designer items). Consumers value them precisely because of their exclusivity and high price.