Economics Class Work Topic: The Demand

G11 Date 16/10/23

Resource Sheet Part: 2

Title: What is the Law of Demand in Economics? - Definition & Example

Law of Demand
There is no escaping it. One of the most fundamental building blocks of economics is the law of
demand. Every time you pull out your pocketbook to purchase something, the law of demand is
at work. The better you understand the law of demand, the better you will understand why you
pay different prices for different goods. If you want to run your own business someday, work in
the marketing department, or simply want to sell your house, your success will start with your
understanding of this concept.
Demand is the relationship between the quantity of a good or service consumers will purchase
and the price charged for that good. The law of demand states that the quantity demanded for
a good rises as the price falls, with all other things staying the same. The 'all other things staying
the same' part is really important.
There are other things that can affect demand besides price. They are prices of related goods or
services, income, tastes or preferences, and expectations. For example, if you really like Apple
products, you might not mind paying a higher price for the new phone that just came out. If you
get a new job and your income goes up, you might not mind paying higher prices for certain
goods because of your newfound wealth.

Examples
In simple language, we can say that when the price of a good rises, people buy less of that good.
When the price falls, people buy more of it, with other things remaining the same. The main
reason economists believe so strongly in the law of demand is that it is so believable, even to
people who don't study economics. The law of demand is ingrained in our way of thinking about
everyday things. Let's see if a few examples help reinforce this.
When the price of an apple goes from $0.95 to $0.75, the quantity demanded will go up. Many
people who weren't willing to buy apples at $0.95 are now willing to purchase them at $0.75.
When your local Starbucks raises the prices of a coffee from $1.75 to $2.25, the quantity of
coffee demanded will decrease. Less people will buy coffee because of the price increase. Some
people may decide to make their own coffee at home, and others will cut back on their number
of weekly trips.
Ask any grocery store expert, and they will tell you that shoppers buy more strawberries when
they are in season and the price is low. This is evidence for the law of demand: only at the lower,
in-season price are consumers willing to buy the higher amount available.
Have you ever tried to sell a house that has sat on the market for a long time? If so, what did
the realtor eventually tell you? I bet he or she said you needed to lower the price. All realtors
Economics Class Work Topic: The Demand
know that the number of potential buyers for any given house increases as the price decreases.
You want to sell that house, lower the price.
When Best Buy promotes a sale on all televisions, they are simply trying to attract those new
individuals that are willing to buy a television at the new lower price - the law of demand at
work.

Exceptions to the Rule

There are a few exceptions worth noting. In rare situations, sometimes a lower price doesn't
increase quantity demanded of a product, or an increase in price doesn't reduce the quantity
demanded of a product.
Here are a few of those rare cases:
• Prestige goods - There are certain commodities, like diamonds or sports cars, that are
purchased as a mark of distinction in society. If the price of these goods rise, the demand
for them may increase instead of falling. These goods can be seen as status or symbols of
wealth.
• Price expectations - If people expect a further rise in the price of a particular good, such
as gas, they may buy more regardless of the rise in price.
• Ignorance of the consumer - If the consumer is ignorant about the rise in price of goods,
he or she may buy more at a higher price.

Factors Affecting Demand

There are multiple factors affecting demand. They include the consumers' income, the price of
the product, the consumers' expectations, the preferences of clients, the number of customers,
and the prices of related goods.
• Consumers' Income
There is a considerable effect on the consumers' income and the commodities they are able
to buy. Nonetheless, there is a direct relationship between the number of commodities
clients are willing to buy and their incomes. If the consumers' income is low, there is a high
chance that they will buy fewer commodities, thus reducing the demand. On the other hand,
if their income is good, the consumers will order many commodities increasing the demand
for some goods and services.

• Price of the Product

The relationship between the prices of products and the amount of demand is inverse. When
the prices are low, there is high demand and vice versa. These two factors form the Law of
Demand.

• The Consumers' Expectations

Consumers' expectations affect demand on two fronts. These fronts can be explained using
examples. The first example is when there is an expected arrival of a new phone, people will
Economics Class Work Topic: The Demand
wait until it comes out. This expectation then lowers the demand for the current phones in
the market. However, when a commodity like fuel is going to rise in its price, there is a higher
chance that people will fill their vehicle tanks with fuel increasing its demand. Therefore,
consumer expectations affect demand differently.

• Preferences of Clients
The preferences of consumers can also significantly affect demand. When consumers love a
specific product, they will buy it in surplus, thus increasing its demand. However, when the
product is bad or has a bad review, there is a high chance that clients will shun it, leading to
reduced demand.

• The Number of Customers

The number of customers also has a considerable effect on demand. For instance, a fast food
shop in a university is likely to have high demand due to the population in the university. But
if there are no clients for a product, the demand is likely to go down.

• Prices of Related Goods

This factor also has a considerable effect on demand. If similar products or products can be
substituted with each other and they have competing prices, clients are likely to go for the
cheaper ones. This will increase the demand for the cheaper product and reduce the demand
for the one with a higher price.

Demand and Quantity Demanded

Quantity demanded is the number of commodities that clients demand in a specific period.
There is a difference between demand and quantity demanded. Demand is the number of
commodities that consumers are willing to purchase during a period of time, while quantity
demanded refers to the number of commodities people will buy at a particular price at a specific
time. Therefore, the difference between these two terms is specificity. Quantity demanded is
more specific than demand.

The Demand Curve

The demand curve is a representation of price against quantity demand for a period of time in
a graph.

The Demand Curve Slopes Downwards

Economics Class Work Topic: The Demand

The prices are plotted on the y axis in the graph while the quantity demand is on the x-axis.
When the demand curve is plotted, it falls for most commodities due to the inverse relation of
these two factors, price and quantity demand. As observed in the curve, when the prices are up,
the demand is low, and when the demand is high, the price is low.

Movements along the Demand Curve

Importance of Ceteris Paribus in Developing the Demand Curve

This is an assumption of the Law of Demand that means all other factors should be held constant
apart from the price and quantity. The central concept of ceteris paribus is when the prices rise,
the demand falls. This concept is integral in developing the demand curve as it provides the idea
of demand in most commodities that prices affect demand.

Shifts in Demand Curve and Movements Along the Demand Curve

Shifts in a demand curve happen as a change in demand occurs, other than price. This change is
guided by the Law of Demand, which indicates that people will buy few commodities if their
prices are high. The main factors that cause shifts in a demand curve are incomes and
preferences. Movement happens along the demand curve, and it indicates a change in the
quantity demanded. These changes have different graphs that represent them.

Shifts in the Demand Curve

Economics Class Work Topic: The Demand

Movement in a Demand Curve

Exemptions of the Law of Demand
There are exemptions to the Law of Demand. They include Giffen Goods, Veblen Goods, and
income changes.

Giffen Goods
Giffen goods are products that customers consume a lot with the rise in their prices. These
products may include food items. An example is bread. An increase in the price of bread will
increase its demand in the market.

A Giffen Goods graph

Veblen Goods
Veblen goods are high-quality goods that are exclusive and are bought by wealthy consumers.
The prices of these goods are very high, and their demand does not follow the Law of Demand.
Consider four prices, namely A, B, C, and D. The prices of these goods are adjusted upward to
see how Veblen goods react to the increase. The Veblen effect can be seen between the price
of products D and C showing that the demand increases when there is an increase in price. The
law of demand holds from product A to product C where an increase in price leads to a reduction
in quantity demanded.

Veblen goods show an increase in demand with a price increase!

Economics Class Work Topic: The Demand

Income Change
Lastly, there is the income change. This exemption indicates that a high-income individual is
likely to purchase expensive items. His purchase power increases with the increase in his
income. Therefore, if he used to eat cheap food, his income change allows him to purchase
expensive food.

Lesson Summary
One of the most fundamental building blocks of economics is the law of demand. The law of
demand states that the quantity demanded for a good rises as the price falls, with all other
things staying the same. In simple language, we can say that when the price of a good rises,
people buy less of that good. When the price falls, people buy more of it. This is most likely
ingrained in your everyday behaviors. How many times you decide to go to the local coffee shop,
how much fruit you buy at the grocery store, and how many people buy your product on eBay,
are all results of the law of demand.