graphical representation of law of demand

Law of Demand

The inverse relationship between the quantity of the good demanded and its price

What is the Law of Demand?

The law of demand states that the quantity demanded of a good shows an inverse relationship with the price of a good when other factors are held constant ( cetris peribus ). It means that as the price increases, demand decreases.

The law of demand is a fundamental principle in macroeconomics. It is used together with the law of supply to determine the efficient allocation of resources in an economy and find the optimal price and quantity of goods.

Graphical Representation of the Law of Demand

The law of demand is usually represented as a graph. The graphical representation of the law of demand is a curve that establishes the relationship between the quantity demanded and the price of a good.

The shape of the demand curve can vary among different types of goods. Most frequently, the demand curve shows a concave shape. However, in many economics textbooks, we can also see the demand curve as a straight line.

The demand curve is drawn against the quantity demanded on the x-axis and the price on the y-axis. The definition of the law of demand indicates that the demand curve is downward sloping.

It is important to distinguish the difference between the demand and the quantity demanded. The quantity demanded is the number of goods that the consumers are willing to buy at a given price point. On the other hand, the demand represents all the available relationships between the good’s prices and the quantity demanded.

Exceptions to the Law of Demand

Unlike the laws of mathematics or physics, the laws of economics are not universal. For example, the law of demand comes with a few exceptions. Some goods do not show an inverse relationship between the price and the quantity. Therefore, the demand curve for these goods is upward-sloping.

1. Giffen goods

These are inferior goods that lack close substitutes that represent a large portion of the consumer’s income. Scottish economist Sir Robert Giffen proposed the existence of such goods in the 19 th  century. Giffen goods violate the law of demand because the prices of these goods increase with the increase in the quantity demanded. However, Giffen goods remain mostly a theoretical concept as there is limited empirical evidence of their existence in the real world.

2. Veblen goods

Certain types of luxury goods violate the law of demand. Veblen goods are named after American economist Thorstein Veblen. Generally, they are luxury goods that indicate the economic and social status of the owner. Therefore, consumers are willing to consume Veblen goods even more when the price increases. Some examples of Veblen goods include luxury cars, expensive wines, and designer clothes.

The Law of Demand in the Real World

The law of demand comes with important applications in the real world. It is an economic principle that guides the actions of politicians and policymakers. The law of demand is quintessential for the fiscal and monetary policies that are undertaken by governments around the world. The policies generally intend to increase or decrease demand to influence the country’s economy.

Additional Resources

Thank you for reading CFI’s guide to the Law of Demand. To keep learning and advancing your career, the following CFI resources will be helpful:

• Law of Supply
• Arc Elasticity
• Opportunity Cost
• Price Elasticity
• See all economics resources
• Share this article

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Learning Objectives

• Define the quantity demanded of a good or service and illustrate it using a demand schedule and a demand curve.
• Distinguish between the following pairs of concepts: demand and quantity demanded, demand schedule and demand curve, movement along and shift in a demand curve.
• Identify demand shifters and determine whether a change in a demand shifter causes the demand curve to shift to the right or to the left.

How many pizzas will people eat this year? How many doctor visits will people make? How many houses will people buy?

Each good or service has its own special characteristics that determine the quantity people are willing and able to consume. One is the price of the good or service itself. Other independent variables that are important determinants of demand include consumer preferences, prices of related goods and services, income, demographic characteristics such as population size, and buyer expectations. The number of pizzas people will purchase, for example, depends very much on whether they like pizza. It also depends on the prices for alternatives such as hamburgers or spaghetti. The number of doctor visits is likely to vary with income—people with higher incomes are likely to see a doctor more often than people with lower incomes. The demands for pizza, for doctor visits, and for housing are certainly affected by the age distribution of the population and its size.

While different variables play different roles in influencing the demands for different goods and services, economists pay special attention to one: the price of the good or service. Given the values of all the other variables that affect demand, a higher price tends to reduce the quantity people demand, and a lower price tends to increase it. A medium pizza typically sells for $5 to $10. Suppose the price were $30. Chances are, you would buy fewer pizzas at that price than you do now. Suppose pizzas typically sold for $2 each. At that price, people would be likely to buy more pizzas than they do now.

We will discuss first how price affects the quantity demanded of a good or service and then how other variables affect demand.

Price and the Demand Curve

Because people will purchase different quantities of a good or service at different prices, economists must be careful when speaking of the “demand” for something. They have therefore developed some specific terms for expressing the general concept of demand.

The quantity demanded of a good or service is the quantity buyers are willing and able to buy at a particular price during a particular period, all other things unchanged. (As we learned, we can substitute the Latin phrase “ceteris paribus” for “all other things unchanged.”) Suppose, for example, that 100,000 movie tickets are sold each month in a particular town at a price of $8 per ticket. That quantity—100,000—is the quantity of movie admissions demanded per month at a price of $8. If the price were $12, we would expect the quantity demanded to be less. If it were $4, we would expect the quantity demanded to be greater. The quantity demanded at each price would be different if other things that might affect it, such as the population of the town, were to change. That is why we add the qualifier that other things have not changed to the definition of quantity demanded.

A demand schedule is a table that shows the quantities of a good or service demanded at different prices during a particular period, all other things unchanged. To introduce the concept of a demand schedule, let us consider the demand for coffee in the United States. We will ignore differences among types of coffee beans and roasts, and speak simply of coffee. The table in Figure 3.1 “A Demand Schedule and a Demand Curve” shows quantities of coffee that will be demanded each month at prices ranging from $9 to $4 per pound; the table is a demand schedule. We see that the higher the price, the lower the quantity demanded.

Figure 3.1 A Demand Schedule and a Demand Curve

The table is a demand schedule; it shows quantities of coffee demanded per month in the United States at particular prices, all other things unchanged. These data are then plotted on the demand curve. At point A on the curve, 25 million pounds of coffee per month are demanded at a price of $6 per pound. At point B, 30 million pounds of coffee per month are demanded at a price of $5 per pound.

The information given in a demand schedule can be presented with a demand curve , which is a graphical representation of a demand schedule. A demand curve thus shows the relationship between the price and quantity demanded of a good or service during a particular period, all other things unchanged. The demand curve in Figure 3.1 “A Demand Schedule and a Demand Curve” shows the prices and quantities of coffee demanded that are given in the demand schedule. At point A, for example, we see that 25 million pounds of coffee per month are demanded at a price of $6 per pound. By convention, economists graph price on the vertical axis and quantity on the horizontal axis.

Price alone does not determine the quantity of coffee or any other good that people buy. To isolate the effect of changes in price on the quantity of a good or service demanded, however, we show the quantity demanded at each price, assuming that those other variables remain unchanged. We do the same thing in drawing a graph of the relationship between any two variables; we assume that the values of other variables that may affect the variables shown in the graph (such as income or population) remain unchanged for the period under consideration.

A change in price, with no change in any of the other variables that affect demand, results in a movement along the demand curve. For example, if the price of coffee falls from $6 to $5 per pound, consumption rises from 25 million pounds to 30 million pounds per month. That is a movement from point A to point B along the demand curve in Figure 3.1 “A Demand Schedule and a Demand Curve” . A movement along a demand curve that results from a change in price is called a change in quantity demanded . Note that a change in quantity demanded is not a change or shift in the demand curve; it is a movement along the demand curve.

The negative slope of the demand curve in Figure 3.1 “A Demand Schedule and a Demand Curve” suggests a key behavioral relationship of economics. All other things unchanged, the law of demand holds that, for virtually all goods and services, a higher price leads to a reduction in quantity demanded and a lower price leads to an increase in quantity demanded.

The law of demand is called a law because the results of countless studies are consistent with it. Undoubtedly, you have observed one manifestation of the law. When a store finds itself with an overstock of some item, such as running shoes or tomatoes, and needs to sell these items quickly, what does it do? It typically has a sale, expecting that a lower price will increase the quantity demanded. In general, we expect the law of demand to hold. Given the values of other variables that influence demand, a higher price reduces the quantity demanded. A lower price increases the quantity demanded. Demand curves, in short, slope downward.

Changes in Demand

Of course, price alone does not determine the quantity of a good or service that people consume. Coffee consumption, for example, will be affected by such variables as income and population. Preferences also play a role. The story at the beginning of the chapter illustrates as much. Starbucks “turned people on” to coffee. We also expect other prices to affect coffee consumption. People often eat doughnuts or bagels with their coffee, so a reduction in the price of doughnuts or bagels might induce people to drink more coffee. An alternative to coffee is tea, so a reduction in the price of tea might result in the consumption of more tea and less coffee. Thus, a change in any one of the variables held constant in constructing a demand schedule will change the quantities demanded at each price. The result will be a shift in the entire demand curve rather than a movement along the demand curve. A shift in a demand curve is called a change in demand .

Suppose, for example, that something happens to increase the quantity of coffee demanded at each price. Several events could produce such a change: an increase in incomes, an increase in population, or an increase in the price of tea would each be likely to increase the quantity of coffee demanded at each price. Any such change produces a new demand schedule. Figure 3.2 “An Increase in Demand” shows such a change in the demand schedule for coffee. We see that the quantity of coffee demanded per month is greater at each price than before. We show that graphically as a shift in the demand curve. The original curve, labeled D 1 , shifts to the right to D 2 . At a price of $6 per pound, for example, the quantity demanded rises from 25 million pounds per month (point A) to 35 million pounds per month (point A′).

Figure 3.2 An Increase in Demand

An increase in the quantity of a good or service demanded at each price is shown as an increase in demand. Here, the original demand curve D 1 shifts to D 2 . Point A on D 1 corresponds to a price of $6 per pound and a quantity demanded of 25 million pounds of coffee per month. On the new demand curve D 2 , the quantity demanded at this price rises to 35 million pounds of coffee per month (point A′).

Just as demand can increase, it can decrease. In the case of coffee, demand might fall as a result of events such as a reduction in population, a reduction in the price of tea, or a change in preferences. For example, a definitive finding that the caffeine in coffee contributes to heart disease, which is currently being debated in the scientific community, could change preferences and reduce the demand for coffee.

A reduction in the demand for coffee is illustrated in Figure 3.3 “A Reduction in Demand” . The demand schedule shows that less coffee is demanded at each price than in Figure 3.1 “A Demand Schedule and a Demand Curve” . The result is a shift in demand from the original curve D 1 to D 3 . The quantity of coffee demanded at a price of $6 per pound falls from 25 million pounds per month (point A) to 15 million pounds per month (point A″). Note, again, that a change in quantity demanded, ceteris paribus, refers to a movement along the demand curve, while a change in demand refers to a shift in the demand curve.

Figure 3.3 A Reduction in Demand

A reduction in demand occurs when the quantities of a good or service demanded fall at each price. Here, the demand schedule shows a lower quantity of coffee demanded at each price than we had in Figure 3.1 “A Demand Schedule and a Demand Curve” . The reduction shifts the demand curve for coffee to D 3 from D 1 . The quantity demanded at a price of $6 per pound, for example, falls from 25 million pounds per month (point A) to 15 million pounds of coffee per month (point A″).

A variable that can change the quantity of a good or service demanded at each price is called a demand shifter . When these other variables change, the all-other-things-unchanged conditions behind the original demand curve no longer hold. Although different goods and services will have different demand shifters, the demand shifters are likely to include (1) consumer preferences, (2) the prices of related goods and services, (3) income, (4) demographic characteristics, and (5) buyer expectations. Next we look at each of these.

Preferences

Changes in preferences of buyers can have important consequences for demand. We have already seen how Starbucks supposedly increased the demand for coffee. Another example is reduced demand for cigarettes caused by concern about the effect of smoking on health. A change in preferences that makes one good or service more popular will shift the demand curve to the right. A change that makes it less popular will shift the demand curve to the left.

Prices of Related Goods and Services

Suppose the price of doughnuts were to fall. Many people who drink coffee enjoy dunking doughnuts in their coffee; the lower price of doughnuts might therefore increase the demand for coffee, shifting the demand curve for coffee to the right. A lower price for tea, however, would be likely to reduce coffee demand, shifting the demand curve for coffee to the left.

In general, if a reduction in the price of one good increases the demand for another, the two goods are called complements . If a reduction in the price of one good reduces the demand for another, the two goods are called substitutes . These definitions hold in reverse as well: two goods are complements if an increase in the price of one reduces the demand for the other, and they are substitutes if an increase in the price of one increases the demand for the other. Doughnuts and coffee are complements; tea and coffee are substitutes.

Complementary goods are goods used in conjunction with one another. Tennis rackets and tennis balls, eggs and bacon, and stationery and postage stamps are complementary goods. Substitute goods are goods used instead of one another. iPODs, for example, are likely to be substitutes for CD players. Breakfast cereal is a substitute for eggs. A file attachment to an e-mail is a substitute for both a fax machine and postage stamps.

As incomes rise, people increase their consumption of many goods and services, and as incomes fall, their consumption of these goods and services falls. For example, an increase in income is likely to raise the demand for gasoline, ski trips, new cars, and jewelry. There are, however, goods and services for which consumption falls as income rises—and rises as income falls. As incomes rise, for example, people tend to consume more fresh fruit but less canned fruit.

A good for which demand increases when income increases is called a normal good . A good for which demand decreases when income increases is called an inferior good . An increase in income shifts the demand curve for fresh fruit (a normal good) to the right; it shifts the demand curve for canned fruit (an inferior good) to the left.

Demographic Characteristics

The number of buyers affects the total quantity of a good or service that will be bought; in general, the greater the population, the greater the demand. Other demographic characteristics can affect demand as well. As the share of the population over age 65 increases, the demand for medical services, ocean cruises, and motor homes increases. The birth rate in the United States fell sharply between 1955 and 1975 but has gradually increased since then. That increase has raised the demand for such things as infant supplies, elementary school teachers, soccer coaches, in-line skates, and college education. Demand can thus shift as a result of changes in both the number and characteristics of buyers.

Buyer Expectations

The consumption of goods that can be easily stored, or whose consumption can be postponed, is strongly affected by buyer expectations. The expectation of newer TV technologies, such as high-definition TV, could slow down sales of regular TVs. If people expect gasoline prices to rise tomorrow, they will fill up their tanks today to try to beat the price increase. The same will be true for goods such as automobiles and washing machines: an expectation of higher prices in the future will lead to more purchases today. If the price of a good is expected to fall, however, people are likely to reduce their purchases today and await tomorrow’s lower prices. The expectation that computer prices will fall, for example, can reduce current demand.

It is crucial to distinguish between a change in quantity demanded, which is a movement along the demand curve caused by a change in price, and a change in demand, which implies a shift of the demand curve itself. A change in demand is caused by a change in a demand shifter. An increase in demand is a shift of the demand curve to the right. A decrease in demand is a shift in the demand curve to the left. This drawing of a demand curve highlights the difference.

Key Takeaways

• The quantity demanded of a good or service is the quantity buyers are willing and able to buy at a particular price during a particular period, all other things unchanged.
• A demand schedule is a table that shows the quantities of a good or service demanded at different prices during a particular period, all other things unchanged.
• A demand curve shows graphically the quantities of a good or service demanded at different prices during a particular period, all other things unchanged.
• All other things unchanged, the law of demand holds that, for virtually all goods and services, a higher price induces a reduction in quantity demanded and a lower price induces an increase in quantity demanded.
• A change in the price of a good or service causes a change in the quantity demanded—a movement along the demand curve.
• A change in a demand shifter causes a change in demand, which is shown as a shift of the demand curve. Demand shifters include preferences, the prices of related goods and services, income, demographic characteristics, and buyer expectations.
• Two goods are substitutes if an increase in the price of one causes an increase in the demand for the other. Two goods are complements if an increase in the price of one causes a decrease in the demand for the other.
• A good is a normal good if an increase in income causes an increase in demand. A good is an inferior good if an increase in income causes a decrease in demand.

All other things unchanged, what happens to the demand curve for DVD rentals if there is (a) an increase in the price of movie theater tickets, (b) a decrease in family income, or (c) an increase in the price of DVD rentals? In answering this and other “Try It!” problems in this chapter, draw and carefully label a set of axes. On the horizontal axis of your graph, show the quantity of DVD rentals. It is necessary to specify the time period to which your quantity pertains (e.g., “per period,” “per week,” or “per year”). On the vertical axis show the price per DVD rental. Since you do not have specific data on prices and quantities demanded, make a “free-hand” drawing of the curve or curves you are asked to examine. Focus on the general shape and position of the curve(s) before and after events occur. Draw new curve(s) to show what happens in each of the circumstances given. The curves could shift to the left or to the right, or stay where they are.

Case in Point: Solving Campus Parking Problems Without Adding More Parking Spaces

Alden Jewell – The Parking Lot – CC BY 2.0.

Unless you attend a “virtual” campus, chances are you have engaged in more than one conversation about how hard it is to find a place to park on campus. Indeed, according to Clark Kerr, a former president of the University of California system, a university is best understood as a group of people “held together by a common grievance over parking.”

Clearly, the demand for campus parking spaces has grown substantially over the past few decades. In surveys conducted by Daniel Kenney, Ricardo Dumont, and Ginger Kenney, who work for the campus design company Sasaki and Associates, it was found that 7 out of 10 students own their own cars. They have interviewed “many students who confessed to driving from their dormitories to classes that were a five-minute walk away,” and they argue that the deterioration of college environments is largely attributable to the increased use of cars on campus and that colleges could better service their missions by not adding more parking spaces.

Since few universities charge enough for parking to even cover the cost of building and maintaining parking lots, the rest is paid for by all students as part of tuition. Their research shows that “for every 1,000 parking spaces, the median institution loses almost $400,000 a year for surface parking, and more than $1,200,000 for structural parking.” Fear of a backlash from students and their parents, as well as from faculty and staff, seems to explain why campus administrators do not simply raise the price of parking on campus.

While Kenney and his colleagues do advocate raising parking fees, if not all at once then over time, they also suggest some subtler, and perhaps politically more palatable, measures—in particular, shifting the demand for parking spaces to the left by lowering the prices of substitutes.

Two examples they noted were at the University of Washington and the University of Colorado at Boulder. At the University of Washington, car poolers may park for free. This innovation has reduced purchases of single-occupancy parking permits by 32% over a decade. According to University of Washington assistant director of transportation services Peter Dewey, “Without vigorously managing our parking and providing commuter alternatives, the university would have been faced with adding approximately 3,600 parking spaces, at a cost of over $100 million…The university has created opportunities to make capital investments in buildings supporting education instead of structures for cars.” At the University of Colorado, free public transit has increased use of buses and light rail from 300,000 to 2 million trips per year over the last decade. The increased use of mass transit has allowed the university to avoid constructing nearly 2,000 parking spaces, which has saved about $3.6 million annually.

Sources: Daniel R. Kenney, “How to Solve Campus Parking Problems Without Adding More Parking,” The Chronicle of Higher Education , March 26, 2004, Section B, pp. B22-B23.

Answer to Try It! Problem

Since going to the movies is a substitute for watching a DVD at home, an increase in the price of going to the movies should cause more people to switch from going to the movies to staying at home and renting DVDs. Thus, the demand curve for DVD rentals will shift to the right when the price of movie theater tickets increases [Panel (a)].

A decrease in family income will cause the demand curve to shift to the left if DVD rentals are a normal good but to the right if DVD rentals are an inferior good. The latter may be the case for some families, since staying at home and watching DVDs is a cheaper form of entertainment than taking the family to the movies. For most others, however, DVD rentals are probably a normal good [Panel (b)].

An increase in the price of DVD rentals does not shift the demand curve for DVD rentals at all; rather, an increase in price, say from P 1 to P 2 , is a movement upward to the left along the demand curve. At a higher price, people will rent fewer DVDs, say Q 2 instead of Q 1 , ceteris paribus [Panel (c)].

Principles of Economics Copyright © 2016 by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

Law of Demand: Schedule, Curve, Function, Assumptions and Exception

The law of demand describes the relationship between the quantity demanded and the price of a product.

It states that the demand for a product decreases with increase in its price and vice versa, while other factors are at constant.

Therefore, there is an inverse relationship between the price and quantity demanded of a product.

“The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or in other words, the amount demanded increases with a fall in price and diminishes with a rise in price”- Marshall.

Some of the definitions of law of demand given by different authors are as follows:

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According to Robertson, “Other things being equal, the lower the price at which a thing is offered, the more a man will be prepared to buy it.”

In the words of Marshall, “The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or in other words, the amount demanded increases with a fall in price and diminishes with a rise in price.”

According to Ferguson, “Law of Demand, the quantity demanded varies inversely with price.”

Demand is a dependent variable, while price is an independent variable.

Therefore, demand is a function of price and can be expressed as follows:

f = Functional Relationship

In the law of demand, other factors of demand (except price) should be kept constant as the demand is subject to various influences. If all the factors would be allowed to vary at the same time, this may counteract the law. The law of demand can be understood with the help of certain concepts, such as demand schedule, demand curve, and demand function.

Demand Schedule :

Demand schedule refers to a tabular representation of the relationship between price and quantity demanded. It demonstrates the quantity of a product demanded by an individual or a group of individuals at specified price and time.

Demand schedule can be categorized into two types, which are shown in Figure-2:

The two types of demand schedules (as shown in Figure-2) are explained as follows:

i. Individual Demand Schedule:

Refers to a tabular representation of quantity of products demanded by an individual at different prices and time.

Table-1 shows the individual demand schedule of product a purchased by Mr. Ram:

Following are the characteristics of individual demand schedule:

a. Demonstrates the effect of changing price on the buying behavior of customers rather than change in the demand for a product

b. Expresses the disparity in demand with the difference in the product’s price

c. Represents that at higher prices the quantity demanded reduces and vice versa

ii. Market Demand Schedule:

Shows a tabular representation of quantity demanded in aggregate by individuals at different prices and time. Therefore, it demonstrates the demand of a product in the market at different prices. The market demand schedule can be derived by aggregating the individual demand schedules.

Table-2 represents the market demand schedule prepared through the individual demand schedule of three individuals:

Market demand schedule also demonstrates an inverse relation between the quantity demanded and price of a product.

Demand Curve :

Demand curve shows a graphical representation of demand schedule. It can be made by plotting price and quantity demanded on a graph. In demand curve, price is represented on Y-axis, while quantity demanded is represented on X-axis on the graph. R.G Lipsey has defined demand curve as “the curve which shows the relationship between the price of a commodity and the amount of that commodity the consumer wishes to purchase is called Demand Curve.”

Demand curve can be of two types, namely, individual demand curve and market demand curve. Individual demand curve is the graphical representation of individual demand schedule, while market demand curve is the representation of market demand schedule.

Figure-3 shows the individual demand curve for the individual demand schedule (represented in Table-1):

In Figure-3 points a, b, c, d, and e demonstrates the relationship between price and quantity demanded at different price levels. By joining these points, we have obtained a curve, DD, which is termed as the individual demand curve. The slope of an individual demand curve is downward from left to right that indicates the inverse relationship of demand with price.

Let us understand the individual demand curve with the help of an example.

Prepare a demand curve for the individual demand schedule of product X.

The individual demand curve for the demand schedule of X (represented in Table-3) is shown in Figure-4:

In Figure-4, the DD curve represents the individual demand curve of product X.

Market demand curve can be obtained by adding market demand schedules. Figure-5 shows the market demand curve for the individual demand schedules (represented in Table-2):

The market demand curve also represents an inverse relationship between the quantity demanded and price of a product.

Let us understand the market demand curve with the help of an example.

Ram, Shyam, Sharad, and Ghanshyam are the four consumers of product P. The individual demand schedules for product P by the four consumers at different price levels is represented in Table-4:

Determine the market demand curve for product P and prepare a market demand curve for product P.

The market demand for product P can be determined by adding the individual demand schedules, as shown in Table-5:

The market demand curve for product P is shown in Figure-6:

In Figure-6, the DD curve represents the demand curve of product P.

Demand Function :

A function can be defined as a mathematical expression that states a relationship between two or more variables containing cause and effect relationship. Similarly, demand function refers to the relationship between the quantity demanded (dependent variable) and the determinants of demand for a product (independent variables). In other words, demand function states the influence of various factors of demand, such as price, customer’s income and habits, and standard of living, on the demand of a product.

In the short run, the demand function states the relationship between the aggregate demand of a product and the price of the product, while keeping other determinants of demand at constant.

In such a case, the demand function can be expressed as follows:

Dx = f (Px)

Where, Dx= dependent variable

Px = independent variable

It can be interpreted from the preceding equation that quantity demanded (Dx) is the function of price (Px) for product X. This states that if there is any change in the price of product X, then the demand of product X would also show changes. However, the demand function does not interpret the amount of change produced in demand due to change in the price of the commodity.

Therefore, to understand the quantitative relationship between demand and price of a commodity, we use the following equation:

Dx = a – b (Px)

Where a = constant (represents total demand at zero price)

b = ∆D/∆P (constant, which represents the change in Dx produced by Px)

On the other hand, in the long run, demand function shows a relationship between the aggregate demand of a product and a number of determinants of demand, such as price, consumer’s income, standard of living, and price of substitutes.

On the basis of time period, the demand function has been classified as follows:

i. Linear Demand Function:

Refers to the demand function in which the change in dependent variable remains constant for a unit change in the independent variable, regardless the level of the dependent variable. In the linear demand function, AD/AP is constant and the resultant demand curve is a straight line.

For example, if a=100 and b=5, then the demand function can be represented by the following equation:

Dx = 100 – 5 (Px)

With the help of the preceding equation, we can get the values of Dx by substituting the different values of Px, as shown in Table-6:

The linear demand function has been represented on graph (for Table-6) in Figure-7:

Price function can be obtained with the help of demand function by the following equation:

Px = a – Dx/ b

Px = a/b-(1 /b) Dx

Let us assume that a/b = a 1 and 1/b = b 1 , then the price function would be:

Px = a 1 – b 1 Dx

ii. Non-Linear Demand Function:

Refers to the demand function in which the dependent variable keeps changing with the change in the independent variable. In the non-linear demand function, the slope of the curve changes throughout the curve.

The equation for non-linear demand function is as follows:

Dx = a (Px) -b and

Dx = (a/Px + c)-b

Where, a or b or c >0

The non-linear demand curve is shown in Figure-8:

iii. Multivariate or Dynamic Demand Function:

Expresses a relationship between a dependent variable, such as demand, and more than one independent variable, such as price and income. In the long-run, individual or market demand cannot be derived by using only one variable because other determinants are not constant and they do affect the demand for a product. In addition, in long-run, demand for a product can be determined by the composite demand of all the determinants affecting the demand for a product.

The multivariate demand function can be expressed as follows:

Dx = f (Px, M, Py, Pc, T, A)

Where, Px = Price

M = Consumer’s income

Py = Price of substitutes

Pc = Price of complementary goods

T = Consumer’s taste

A= Advertisement expenditure

If the relationship between the demand and its determinants is a straight or linear line, then demand function can be expressed as follows:

Dx = a + b Px + cM + dPy + ePc + g T + jA

Where, a = constant and b, c, d, e, g, and j = coefficients of relation between demand and its determinants

XYZ Organization has launched product D at the price of Rs. 20 per unit. With the increasing demand of product D, its price has reached to Rs. 25. The change in demand for the product is noticed to be 10 per week. After that, the price continuously with the increase in demand at the same rate and has reached to Rs. 35.

Determine the following for product D (taking a = 100):

i. Demand Function Equation

ii. Demand Schedule

iii. Demand Curve

i. The demand function for product D can be expressed as follows:

D D = a – b (Pd)

Where, a = 20

Therefore, the demand function would be:

D D = 20 – 2 (P D )

ii. The demand schedule for product D is shown in Table-7:

iii. The demand curve for product D is shown in Figure-9:

Assumptions in Law of Demand :

The law of demand studies the change in demand with relation to change in price. In other words, the main assumption of law of demand is that it studies the effect of price on demand of a product, while keeping other determinants of demand at constant.

However there are certain assumptions underlying the law of demand, which are as follows:

i. Assumes that the consumer’s income remains same. If the income of an individual increases, the demand for products by him/her also increases, which is against the law of demand. Therefore, the income of consumer should not change.

ii. Assumes that the preferences of consumer remain same.

iii. Considers that the fashion does not show any changes, because if fashion changes, then people would not purchase the products that are out of fashion.

iv. Assumes that there would be no change in the age structure, size, and sex ratio of population. This is because if population size increases, then the number of buyers increases, which, in turn, affect the demand for a product directly.

v. Restricts the innovation and new varieties of products in the market, which can affect the demand for the existing product.

vi. Restricts changes in the distribution of income.

vii. Avoids any type of change fiscal policies of the government of a nation, which reduces the effect of taxation on the demand of product.

Apart from the aforementioned points, the law of demand assumes that the world is static and people consume products in the market at a fixed rate and price. These assumptions are not valid in the changing world.

Exception to Law of Demand :

Till now, we have studied that there is an inverse relationship between demand and price of a product. The universal law of demand states that the increase in the price of a product would decrease the demand for that product and vice versa.

However, there are certain exceptions that with a fall in price, the demand also falls and there is an increase in demand with increase in price. This situation is paradoxical in nature and regarded as exception to the law of demand. In simple words, exception to law o demand refers to conditions where the law of demand is not applicable. In case of exceptions, demand curve shows an upward slope and referred as exceptional demand curve.

Exceptional demand curve is shown in Figure-10:

In Figure-10, D represents the demand curve in which OP1 is the price, and OQ1 is the initial demand. When the price rises from OP1 to OP2, then the demand also rises from OQ1 to OQ2. This implies that if the price of a product increases its demand also increases, which constitutes an exception to law of demand.

Certain cases that are exceptions to the law of demand are as follows:

i. Giffen Paradox:

Refer to one of the major criticism of law of demand. Giffin Paradox was given by Sir Robert Giffen, who classified goods into two types, inferior goods and superior goods, generally called Giffen goods. The inferior goods are those whose demand decreases with increase in consumer’s income, such as cheap potatoes and vegetable ghee.

These goods are of low quality; therefore, the demand for these goods decreases with increase in consumer’s income. In addition, if the price of these goods increases, then the demand for these goods increases assuming that the high price good would be of good quality tor example, coffee is considered as superior and tea as inferior. In case tile price of both of these goods increases the consumers would increase the demand of tea to satisfy their need by paying tile same amount.

ii. Necessity Goods:

Refer to goods that are considered as essential for consumer. The demand of necessity goods does not increase or decrease with increase or decrease in their prices. For example, salt is a necessity good whose consumption cannot be increased in case its price decreases. In such a scenario, the law of demand is not applicable.

iii. Prestige Goods:

Refers to goods that are perceived as a status symbol, such as diamond and Johny Walker Scotch Whisky. The demand for these goods remains same in case of increase or decrease in their price. In such a case, the law of demand is not applicable.

iv. Speculation:

Refers to an assumption of consumers about the change in prices of a product in future. If the price of a product IS expected to rise in future, then the demand for the product increases in the present situation. However, this is against the law of demand.

v. Psychologically Bias Customers:

Refer to one of the important exceptions to the law of demand. Different customers have different perceptions about the price of a product. Some customers have perceptions that low price means bad quality of a particular product, which is not true in all cases. Therefore, if there is a fall in the price of a product, then the demand for that product decreases automatically.

vi. Brand Loyalty:

Refers to the preference of a consumer towards a particular brand. Consumers do not prefer to change a brand with increase in the price of that brand. For example, if a consumer prefers, to wear Levi’s jeans, he would continue to purchase it, irrespective of increase in its price. In such a situation, the law of demand cannot be applied.

vii. Emergency Situations:

Refers to a condition for which the law of demand is not applicable. In emergencies, such as war flood, earthquake, and famine, the availability of goods become scarce and uncertain. Therefore, in such situations, consumer.’ prefer to store a large quantity of goods, regardless of their prices.

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• Law of Supply: Schedule, Curve, Function, Assumptions and Exception
• Relationship between Demand Function and Demand Curve
• Notes on Market Demand Function and Market Demand Curve
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Law of Demand – Definition, Explanation

The law of demand states that ceteris paribus (other things being equal)

• If the price of good rises, then the quantity demanded will fall
• If the price of a good falls, then the quantity demand will rise.

At point (A) Price is £1.20 and the quantity demand is 40,000 tonnes. When the price falls to £0.90, the quantity demanded rises to 55,000 tonnes (point B)

If the price fell to £0.70, demand would rise to 75,000.

What explains the law of demand?

There are two factors that explain the inverse relationship between price and quantity demand.

1. Income effect . If prices rise, people will feel poorer after purchasing the more expensive goods. They will have less disposable income and so cannot afford to buy as much. If you have an income of £100, then an increase in the price of goods, your real income is effectively falling.

2. Substitution effect . If the price of one good rise, consumers will be encouraged to buy alternative goods which are now relatively cheaper than they were. For example, if the price of potatoes rises, it will encourage consumers to buy rice instead.

Demand Schedule

A demand schedule is a table showing the different quantities of a good that consumers are willing and able to buy at various prices for a particular period.

This is the market demand schedule for Netflix subscriptions

Demand Curve

A demand curve can be for an individual consumer or the whole market (market demand curve)

Exceptions to the law of demand

Giffen Good . This is good where a higher price causes an increase in demand (reversing the usual law of demand). The increase in demand is due to the income effect of the higher price outweighing the substitution effect. The idea is that if you are very poor and the price of your basic foodstuff (e.g. rice) increases, then you can’t afford the more expensive alternative food (meat) therefore, you end up buying more rice because it is the only thing you can afford. These goods are very rare and require a society with very low income and limited consumer choices.

Veblen good/ostentatious good . This is where if the price rises, then some people may want to buy more because the higher price makes the good appear more attractive. For example, if designer clothing becomes more expensive than for some individuals, the higher price makes it more expensive. However, whilst individual demand curves may be upward sloping. The market demand curve is unlikely to be. Because although it may be more desirable not everyone can afford it. In fact, the super-rich wants to buy more – precisely because it is exclusive.

Nobody buys the cheapest. Another possibility is that in restaurants, the most popular wine is the second cheapest. This is due to the behavioural choices of consumers. When going out to a restaurant, people don’t like to buy the cheapest wine because it suggests you don’t care about giving diners a good meal. Therefore, often the second cheapest wine often sells more because people think they are getting better quality. Therefore, if you increase the price of the cheapest wine, its demand may actually rise.

Perfectly inelastic . If demand is perfectly inelastic, then an increase in the price has no effect on reducing demand. This may be good like salt, which is very cheap but essential.

Perfectly elastic . Demand is infinite at a certain price, therefore reducing the price will not change the quantity demanded.

• Factors affecting demand
• Shift in Demand and Movement along the Demand Curve

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What Is Demand?

Understanding demand, determinants of demand, the law of demand.

• Demand Curve

Market Equilibrium

• Market vs. Aggregate Demand

Macroeconomic Policy and Demand

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Demand: How It Works Plus Economic Determinants and the Demand Curve

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Demand is an economic concept that relates to a consumer's desire to purchase goods and services and willingness to pay a specific price for them. An increase in the price of a good or service tends to decrease the quantity demanded . Likewise, a decrease in the price of a good or service will increase the quantity demanded.

Demand is a concept that consumers and businesses are very familiar with because it makes sense and occurs naturally in the course of practically any day. For example, shoppers with an eye on products that they want will buy more when the products' prices are low . When something happens to raise the prices, such as a change of season, shoppers buy fewer or perhaps none at all.

Generally speaking, there is market demand and aggregate demand. Market demand is the total quantity demanded by all consumers in a market for a given good. Aggregate demand is the total demand for all goods and services in an economy. Multiple stocking strategies are often required to handle demand.

Key Takeaways

• The law of demand concerns consumers' changing desire to purchase goods and services at given prices.
• Demand can refer to either market demand for a specific good or aggregate demand for the total of all goods in an economy.
• Demand and supply determine the actual prices of goods and the volume that changes hands in a market.
• Businesses study demand to price products to meet demand and generate profits.
• The demand curve demonstrates visually how the decreasing price for a product increases the quantity purchased.

Investopedia / Paige McLaughlin

Businesses can spend a considerable amount of money to determine the amount of demand the public has for their products and services. How many of their goods will they actually be able to sell at any given price?

Incorrect estimations can result in lost sales from willing buyers if demand is underestimated or losses from leftover inventory if demand is overestimated. Demand helps fuel profits and the economy. That's why it's an important concept.

Demand is closely related to the concept of supply . While consumers try to pay the lowest prices they can for goods and services, suppliers try to maximize profits.

If suppliers charge too much for a product, the quantity demanded drops and suppliers may not sell enough product to earn sufficient profits. If suppliers charge too little, the quantity demanded increases but lower prices may not cover suppliers’ costs or allow for profits.

Some factors affecting demand include the appeal of a good or service, the availability of competing goods, the availability of financing, and the perceived availability of a good or service.

Demand elasticity relates to how sensitive the demand for a product is as the price for it changes. For example, if there's a big change in demand due to a small change in price, demand elasticity is said to be high. Shoppers may choose attractive substitute products if the price for their usual product has increased somewhat. That could indicate high demand elasticity and is useful for businesses to know.

There are five main factors that drive demand:

• Product/service price
• Buyer's income
• Prices of substitute goods
• Consumer preferences
• Consumer expectations for a change in price

As these factors change, so can the demand for a product or service. In fact, they change all the time, so demand can be constantly in flux.

The law of demand states that when prices rise, demand will fall. When prices fall, demand will rise.

The law of demand is simply an expression of the inverse relationship between price and demand. It involves price only. None of the other drivers of demand mentioned above are involved. If they do come into play, the functioning of the law can be affected. Demand can be seen to change for reasons other than price.

A demand curve is a graph that displays the change in demand resulting from a change in price. It's a visual representation of the law of demand.

The demand curve can be a useful tool for businesses because it can show them the prices at which consumers start buying less or more. It can point out prices at which a company can maintain consumer demand and support reasonable profits.

On the demand curve graph, the vertical axis denotes the price, while the horizontal axis denotes the quantity demanded . A demand schedule , or a table created by a business that lists the quantity of a product that consumers will buy at particular price points, can provide the figures for the demand curve chart.

Once plotted, the demand curve slopes downward, from left to right. As prices increase, consumers demand less of a good or service.

A supply curve slopes upward. As prices increase, suppliers provide more of a good or service.

The point where supply and demand curves intersect represents the market clearing or market equilibrium price. An increase in demand shifts the demand curve to the right. The two curves then intersect at a higher price, which means consumers are willing to pay more for the product.

Equilibrium prices typically change for most goods and services because factors affecting supply and demand are always changing. Free, competitive markets tend to push prices toward market equilibrium.

Market Demand vs. Aggregate Demand

The market for each good in an economy faces a different set of circumstances, which vary in type and degree. In macroeconomics, we also look at aggregate demand in an economy.

Aggregate demand refers to the total demand by all consumers for all goods and services in an economy across all the markets for individual goods. Since aggregate demand includes all goods in an economy, it is not sensitive to competition or the substitution of goods.

Nor is it due to changes in consumer preferences between various goods. Demand in individual goods markets can be affected by these factors.

Fiscal and monetary authorities, such as the Federal Reserve, devote much of their macroeconomic policy-making to managing aggregate demand.

If the Fed wants to reduce demand, it can raise interest rates and increase prices by curtailing the growth of the money supply and credit. If it needs to increase demand, the Fed can lower interest rates and increase the money supply, giving consumers and businesses more money to spend.

In certain cases, even the Fed can’t fuel demand. When unemployment is on the rise, people may not be able to afford to spend or take on cheaper debt, even with low interest rates.

What Is Meant by Demand?

The economic principle of demand concerns the quantity of a particular product or service that consumers are willing to purchase at various prices. Demand looks at a market's pricing and purchases from a consumer's point of view. On the other hand, the principle of supply underscores the point of view of the supplier of the product or service.

What Is the Demand Curve?

The demand curve is a graphical representation of the law of demand. It plots prices on a chart. The line that connects those prices is the demand curve. The vertical axis represents the prices of products. The horizontal axis represents product quantity. Typically, the curve starts on the left side high up the vertical axis, and descends across the chart to the right. The slope indicates that as prices decrease, demand, as shown by a growing number of products purchased, increases.

What Is the Importance of Demand?

Economically speaking, the principle of demand is important for both consumers and businesses that sell products and/or services. For businesses, understanding demand is vital when making decisions about inventory, pricing, and aiming for a particular profit. Consumers who have an understanding of demand can make confident decisions about what products to buy and when to buy them.

Demand is a core economic concept that shows how much of a good or service consumers are willing to buy at different prices. The concept is used by businesses to determine prices and used by consumers to know when to make a purchase. The demand curve visually depicts how demand changes in relation to price: when price increases, demand decreases; when price decreases, demand increases.

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LAW OF DEMAND AND DEMAND CURVE EXPLAINED

Table of Contents

Introduction:

The law of demand is a fundamental principle in economics that governs the relationship between the price of a good or service and the quantity demanded by consumers. This inverse relationship, known as the law of demand, forms the basis for understanding consumer behavior and market dynamics. The demand curve, a graphical representation of this relationship, provides valuable insights into how changes in price impact the quantity demanded. In this article, we will delve into the intricacies of the law of demand, explore the factors that influence the demand curve, and provide real-world examples for a comprehensive understanding.

The Law of Demand:

Definition and explanation:.

The law of demand states that, all other factors being constant (ceteris paribus), the quantity demanded of a good or service is inversely related to its price. In simpler terms, as the price of a product increases, consumers tend to demand less of it, and as the price decreases, consumers are willing to demand more. This inverse relationship is rooted in the concept of diminishing marginal utility, which suggests that the additional satisfaction or utility derived from consuming each additional unit of a good decreases.

Factors Influencing Demand:

While price is the primary factor influencing demand, several other variables also play a significant role. These include income levels, consumer preferences, the prices of related goods (substitutes and complements), expectations, and demographic factors. Understanding these factors is crucial for predicting how changes in the market can impact the demand for a product.

Income Levels:

Income levels can affect both the ability and willingness of consumers to purchase a good. Generally, an increase in income leads to a higher demand for normal goods, as consumers can afford to buy more. Conversely, a decrease in income may shift consumers toward cheaper alternatives or result in lower demand for certain goods.

Consumer Preferences:

Consumer preferences can significantly influence demand. Changes in tastes and trends can lead to shifts in the demand for specific products. For example, a growing preference for environmentally friendly products may increase the demand for electric vehicles.

Prices of Related Goods:

The prices of related goods, including substitutes and complements, can also impact demand. Substitutes are goods that can be used in place of each other, like tea and coffee. When the price of one substitute increases, the demand for the other may rise. Complements, on the other hand, are goods that are used together, such as smartphones and mobile data plans. A decrease in the price of one complement can increase the demand for the other.

Expectations:

Consumer expectations about future prices, income levels, or product availability can influence their current purchasing decisions. For instance, if consumers anticipate a price increase for a particular good in the future, they may demand more of it in the present.

Demographic Factors:

Demographic characteristics such as age, gender, and geographic location can also impact demand. Certain products may be more in demand among specific age groups or regions, influencing the overall demand for those goods.

The Demand Curve:

The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded. It is typically depicted as a downward-sloping line, with price on the vertical axis and quantity demanded on the horizontal axis. This curve illustrates the law of demand by showing that as price decreases, the quantity demanded increases, and vice versa.

Shape of the Demand Curve:

The shape of the demand curve can vary depending on the elasticity of demand, which measures the responsiveness of quantity demanded to changes in price. There are three main types of demand curves based on elasticity: Elastic demand: When the demand curve is relatively flat, indicating that a small change in price leads to a significant change in quantity demanded. This is often seen in products with many substitutes. Inelastic demand: When the demand curve is steep, suggesting that a large change in price has a relatively small impact on quantity demanded. Essential goods with few substitutes typically exhibit inelastic demand. Unit elastic demand: When the percentage change in quantity demanded is equal to the percentage change in price, resulting in a linear demand curve.

Factors Shifting the Demand Curve:

Changes in factors other than price, such as income levels, consumer preferences, or expectations, can lead to shifts in the demand curve. These shifts represent changes in the overall demand for a product at each price level, causing the entire curve to move either to the right (increase in demand) or to the left (decrease in demand).

 Real-World Examples:

Price change:.

Consider the market for smartphones. When the price of smartphones increases, consumers may opt for cheaper alternatives or delay their purchase, resulting in a decrease in the quantity demanded. Conversely, a price decrease may stimulate demand as consumers find the product more affordable.

Income Change:

Imagine a scenario where there is a rise in disposable income levels. In the market for luxury items, such as designer clothing or fine dining experiences, this increase in income can lead to a rightward shift in the demand curve. Consumers, with higher incomes, are now willing and able to purchase these luxury items, increasing the overall demand at each price level.

Change in Consumer Preferences:

Shifts in consumer preferences can also impact the demand curve. For instance, if environmental consciousness increases, the demand for eco-friendly products may surge, causing a rightward shift in the demand curve for hybrid or electric vehicles.

Substitutes and Complements:

Let’s consider coffee and tea as examples of substitute goods. When the price of coffee increases, consumers may switch to tea as a substitute, leading to an increase in the demand for tea and a leftward shift in its demand curve. On the other hand, if the price of coffee decreases, consumers may opt for coffee instead of tea, causing a rightward shift in the demand curve for coffee.

Conclusion:

The law of demand and the demand curve are fundamental concepts in economics that provide insights into consumer behavior and market dynamics. The law of demand highlights the inverse relationship between price and quantity demanded, while the demand curve visually represents this relationship. Understanding the factors that influence demand and the shape of the demand curve is crucial for businesses, policymakers, and economists to make informed decisions. Real-world examples help illustrate how changes in price, income, consumer preferences, and related goods can impact the demand for products, shaping market trends and influencing economic outcomes.

Demand in power to purchase a product with willingness to purchase it. Willingness and ability to pay are necessary conditions of demand.

Law of demand

Law of demand states that when price of a product increases, its demand decreases in market and vice versa.

Assumptions of Law

• no change in taste or fashion.
• Money income of the consumer remains constant
• Price of other goods remains constant.

Demand schedule and curve:

The demand schedule refers to the various quantities of a good which a consumer would demand at various hypothetical prices.

Negatively sloped demand curve also shows that there is a negative relation between price and quantity demanded of a good.

Real demand curve:

A real demand curve slopes downward from left to right and convex to the origin, which shows that quantity demanded increases progressively with the fall in price.

Reasons of negative slope of demand curve:

• Income effect;
• Substitution effect;
• Entry of new consumers into the market;
• Diminishing Marginal Utility.

The first factor causes on-the-line change while the remaining factors cause Shift in demand curve. The price of a good held constant, when the demand increases it shifts demand curve upwards while the decrease in demand is shown as inward shift in demand curve.

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3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services

Learning objectives.

By the end of this section, you will be able to:

• Explain demand, quantity demanded, and the law of demand
• Explain supply, quantity supplied, and the law of supply
• Identify a demand curve and a supply curve
• Explain equilibrium, equilibrium price, and equilibrium quantity

First let’s first focus on what economists mean by demand, what they mean by supply, and then how demand and supply interact in a market.

Demand for Goods and Services

Economists use the term demand to refer to the amount of some good or service consumers are willing and able to purchase at each price. Demand is fundamentally based on needs and wants—if you have no need or want for something, you won't buy it. While a consumer may be able to differentiate between a need and a want, from an economist’s perspective they are the same thing. Demand is also based on ability to pay. If you cannot pay for it, you have no effective demand. By this definition, a person who does not have a drivers license has no effective demand for a car.

What a buyer pays for a unit of the specific good or service is called price . The total number of units that consumers would purchase at that price is called the quantity demanded . A rise in price of a good or service almost always decreases the quantity demanded of that good or service. Conversely, a fall in price will increase the quantity demanded. When the price of a gallon of gasoline increases, for example, people look for ways to reduce their consumption by combining several errands, commuting by carpool or mass transit, or taking weekend or vacation trips closer to home. Economists call this inverse relationship between price and quantity demanded the law of demand . The law of demand assumes that all other variables that affect demand (which we explain in the next module) are held constant.

We can show an example from the market for gasoline in a table or a graph. Economists call a table that shows the quantity demanded at each price, such as Table 3.1 , a demand schedule . In this case we measure price in dollars per gallon of gasoline. We measure the quantity demanded in millions of gallons over some time period (for example, per day or per year) and over some geographic area (like a state or a country). A demand curve shows the relationship between price and quantity demanded on a graph like Figure 3.2 , with quantity on the horizontal axis and the price per gallon on the vertical axis. (Note that this is an exception to the normal rule in mathematics that the independent variable (x) goes on the horizontal axis and the dependent variable (y) goes on the vertical axis. While economists often use math, they are different disciplines.)

Table 3.1 shows the demand schedule and the graph in Figure 3.2 shows the demand curve. These are two ways to describe the same relationship between price and quantity demanded.

Demand curves will appear somewhat different for each product. They may appear relatively steep or flat, or they may be straight or curved. Nearly all demand curves share the fundamental similarity that they slope down from left to right. Demand curves embody the law of demand: As the price increases, the quantity demanded decreases, and conversely, as the price decreases, the quantity demanded increases.

Confused about these different types of demand? Read the next Clear It Up feature.

Clear It Up

Is demand the same as quantity demanded.

In economic terminology, demand is not the same as quantity demanded. When economists talk about demand, they mean the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or a demand schedule. When economists talk about quantity demanded, they mean only a certain point on the demand curve, or one quantity on the demand schedule. In short, demand refers to the curve and quantity demanded refers to a (specific) point on the curve.

Supply of Goods and Services

When economists talk about supply , they mean the amount of some good or service a producer is willing to supply at each price. Price is what the producer receives for selling one unit of a good or service . A rise in price almost always leads to an increase in the quantity supplied of that good or service, while a fall in price will decrease the quantity supplied. When the price of gasoline rises, for example, it encourages profit-seeking firms to take several actions: expand exploration for oil reserves; drill for more oil; invest in more pipelines and oil tankers to bring the oil to plants for refining into gasoline; build new oil refineries; purchase additional pipelines and trucks to ship the gasoline to gas stations; and open more gas stations or keep existing gas stations open longer hours. Economists call this positive relationship between price and quantity supplied—that a higher price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied—the law of supply . The law of supply assumes that all other variables that affect supply (to be explained in the next module) are held constant.

Still unsure about the different types of supply? See the following Clear It Up feature.

Is supply the same as quantity supplied?

In economic terminology, supply is not the same as quantity supplied. When economists refer to supply, they mean the relationship between a range of prices and the quantities supplied at those prices, a relationship that we can illustrate with a supply curve or a supply schedule. When economists refer to quantity supplied, they mean only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply refers to the curve and quantity supplied refers to a (specific) point on the curve.

Figure 3.3 illustrates the law of supply, again using the market for gasoline as an example. Like demand, we can illustrate supply using a table or a graph. A supply schedule is a table, like Table 3.2 , that shows the quantity supplied at a range of different prices. Again, we measure price in dollars per gallon of gasoline and we measure quantity supplied in millions of gallons. A supply curve is a graphic illustration of the relationship between price, shown on the vertical axis, and quantity, shown on the horizontal axis. The supply schedule and the supply curve are just two different ways of showing the same information. Notice that the horizontal and vertical axes on the graph for the supply curve are the same as for the demand curve.

The shape of supply curves will vary somewhat according to the product: steeper, flatter, straighter, or curved. Nearly all supply curves, however, share a basic similarity: they slope up from left to right and illustrate the law of supply: as the price rises, say, from $1.00 per gallon to $2.20 per gallon, the quantity supplied increases from 500 gallons to 720 gallons. Conversely, as the price falls, the quantity supplied decreases.

Equilibrium—Where Demand and Supply Intersect

Because the graphs for demand and supply curves both have price on the vertical axis and quantity on the horizontal axis, the demand curve and supply curve for a particular good or service can appear on the same graph. Together, demand and supply determine the price and the quantity that will be bought and sold in a market.

Figure 3.4 illustrates the interaction of demand and supply in the market for gasoline. The demand curve (D) is identical to Figure 3.2 . The supply curve (S) is identical to Figure 3.3 . Table 3.3 contains the same information in tabular form.

Remember this: When two lines on a diagram cross, this intersection usually means something. The point where the supply curve (S) and the demand curve (D) cross, designated by point E in Figure 3.4 , is called the equilibrium . The equilibrium price is the only price where the plans of consumers and the plans of producers agree—that is, where the amount of the product consumers want to buy (quantity demanded) is equal to the amount producers want to sell (quantity supplied). Economists call this common quantity the equilibrium quantity . At any other price, the quantity demanded does not equal the quantity supplied, so the market is not in equilibrium at that price.

In Figure 3.4 , the equilibrium price is $1.40 per gallon of gasoline and the equilibrium quantity is 600 million gallons. If you had only the demand and supply schedules, and not the graph, you could find the equilibrium by looking for the price level on the tables where the quantity demanded and the quantity supplied are equal.

The word “equilibrium” means “balance.” If a market is at its equilibrium price and quantity, then it has no reason to move away from that point. However, if a market is not at equilibrium, then economic pressures arise to move the market toward the equilibrium price and the equilibrium quantity.

Imagine, for example, that the price of a gallon of gasoline was above the equilibrium price—that is, instead of $1.40 per gallon, the price is $1.80 per gallon. The dashed horizontal line at the price of $1.80 in Figure 3.4 illustrates this above-equilibrium price. At this higher price, the quantity demanded drops from 600 to 500. This decline in quantity reflects how consumers react to the higher price by finding ways to use less gasoline.

Moreover, at this higher price of $1.80, the quantity of gasoline supplied rises from 600 to 680, as the higher price makes it more profitable for gasoline producers to expand their output. Now, consider how quantity demanded and quantity supplied are related at this above-equilibrium price. Quantity demanded has fallen to 500 gallons, while quantity supplied has risen to 680 gallons. In fact, at any above-equilibrium price, the quantity supplied exceeds the quantity demanded. We call this an excess supply or a surplus .

With a surplus, gasoline accumulates at gas stations, in tanker trucks, in pipelines, and at oil refineries. This accumulation puts pressure on gasoline sellers. If a surplus remains unsold, those firms involved in making and selling gasoline are not receiving enough cash to pay their workers and to cover their expenses. In this situation, some producers and sellers will want to cut prices, because it is better to sell at a lower price than not to sell at all. Once some sellers start cutting prices, others will follow to avoid losing sales. These price reductions in turn will stimulate a higher quantity demanded. Therefore, if the price is above the equilibrium level, incentives built into the structure of demand and supply will create pressures for the price to fall toward the equilibrium.

Now suppose that the price is below its equilibrium level at $1.20 per gallon, as the dashed horizontal line at this price in Figure 3.4 shows. At this lower price, the quantity demanded increases from 600 to 700 as drivers take longer trips, spend more minutes warming up the car in the driveway in wintertime, stop sharing rides to work, and buy larger cars that get fewer miles to the gallon. However, the below-equilibrium price reduces gasoline producers’ incentives to produce and sell gasoline, and the quantity supplied falls from 600 to 550.

When the price is below equilibrium, there is excess demand , or a shortage —that is, at the given price the quantity demanded, which has been stimulated by the lower price, now exceeds the quantity supplied, which has been depressed by the lower price. In this situation, eager gasoline buyers mob the gas stations, only to find many stations running short of fuel. Oil companies and gas stations recognize that they have an opportunity to make higher profits by selling what gasoline they have at a higher price. As a result, the price rises toward the equilibrium level. Read Demand, Supply, and Efficiency for more discussion on the importance of the demand and supply model.

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• Authors: Steven A. Greenlaw, David Shapiro, Daniel MacDonald
• Publisher/website: OpenStax
• Book title: Principles of Economics 3e
• Publication date: Dec 14, 2022
• Location: Houston, Texas
• Book URL: https://openstax.org/books/principles-economics-3e/pages/1-introduction
• Section URL: https://openstax.org/books/principles-economics-3e/pages/3-1-demand-supply-and-equilibrium-in-markets-for-goods-and-services

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Law of Demand: Assumptions, Exceptions and Limitations

The law of demand states that, other things remaining the same, the quantity demanded of a commodity is inversely related to its price.

It is one of the important laws of economics which was firstly propounded by neo-classical economist, Alfred Marshall.

Other things remaining the same, the amount demanded increases with a fall in price and diminishes with a rise in price. – Alfred Marshall

Thus, according to the law of demand, there is an inverse relationship between price and quantity demanded, other things remaining the same.

Law of demand expresses the functional relationship

where, P is price and D is quantity demanded of a commodity

Other things being equal , if a price of a commodity falls, the quantity demanded of it will rise, and if the price of the commodity rises, its quantity demanded will decline.

Assumptions under which law of demand is valid

This law will be applicable only if the below mentioned points are fulfilled.

• No change in price of related commodities.
• No change in income of the consumer.
• No change in taste and preferences, customs, habit and fashion of the consumer.
• No change in size of population
• No expectation regarding future change in price.

Understanding law of demand using demand schedule

This law can be explained with the help of demand schedule and demand curve as presented below:

Demand Schedule is a tabular representation of various combinations of price and quantity demanded by a consumer during a particular period of time. An imaginary demand schedule is given below:

The above demand schedule shows negative relationship between price and quantity demanded for a commodity.

Initially, when a price of a good is Rs.10 per kg, quantity demanded by the consumer is 10 kg.

As the price decrease from Rs.10 per kg to Rs.8 per kg and then to Rs.6 per kg, quantity demanded by the consumer increases from 10 kg to 20 kg and then to 30 kg respectively.

Further, fall in price from Rs.6 per kg to Rs.4 per kg and then to Rs.2 per kg, results in increase in quantity demanded by the consumer from 30 kg to 40 kg and then to 50 kg, respectively.

Thus, from the above schedule we can conclude that there is opposite inverse relationship in between price and quantity demanded for a commodity.

Understanding law of demand using demand curve

It is the graphical representation of demand schedule. In other words, it is a graphical representation of the quantities of a commodity which will be demanded by the consumer at various particular prices in a particular period of time, other things remaining the same.

We can show, the above demand schedule through the following demand curve:

In the figure above, price and quantity demanded are measured along the y-axis and x-axis respectively. By plotting various combinations of price and quantity demanded, we get a demand curve DD 1 derived from points A , B , C , D and E .

This is a downward sloping demand curve showing inverse relationship between price and quantity demanded.

Limitations/Exceptions of law of demand

Inferior goods/ giffen goods.

Some special varieties of inferior goods are termed as giffen goods. Cheaper varieties of goods like low priced rice, low priced bread, etc. are some examples of Giffen goods.

This exception was pointed out by Robert Giffen who observed that when the price of bread increased, the low paid British workers purchased lesser quantity of bread, which is against the law of demand. Thus, in case of Giffen goods, there is indirect relationship between price and quantity demanded.

Goods having prestige value

This exception is associated with the name of the economist, T.Velben and his doctrine of conspicuous conception. Few goods like diamond can be purchased only by rich people. The prices of these goods are so high that they are beyond the capacity of common people. The higher the price of the diamond the higher the prestige value of it.

In this case, a consumer will buy less of the diamonds at a low price because with the fall in price, its prestige value goes down. On the other hand, when price of diamonds increase, the prestige value goes up and therefore, the quantity demanded of it will increase.

Price expectation

When the consumer expects that the price of the commodity is going to fall in the near future, they do not buy more even if the price is lower.

On the other hand, when they expect further rise in price of the commodity, they will buy more even if the price is higher. Both of these conditions are against the law of demand.

Fear of shortage

When people feel that a commodity is going to be scarce in the near future, they buy more of it even if there is a current rise in price.

For example: If the people feel that there will be shortage of L.P.G. gas in the near future, they will buy more of it, even if the price is high.

Change in income

The demand for goods and services is also affected by change in income of the consumers.

If the consumers’ income increases, they will demand more goods or services even at a higher price. On the other hand, they will demand less quantity of goods or services even at lower price if there is decrease in their income. It is against the law of demand.

Change in fashion

The law of demand is not applicable when the goods are considered to be out of fashion.

If the commodity goes out of fashion, people do not buy more even if the price falls. For example: People do not purchase old fashioned shirts and pants nowadays even though they’ve become cheap. Similarly, people buy fashionable goods in spite of price rise.

Basic necessities of life

In case of basic necessities of life such as salt, rice, medicine, etc. the law of demand is not applicable as the demand for such necessary goods does not change with the rise or fall in price.

[ Related Reading : Law of Supply ]

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demand curve

demand curve , in economics , a graphic representation of the relationship between product price and the quantity of the product demanded. It is drawn with price on the vertical axis of the graph and quantity demanded on the horizontal axis. With few exceptions, the demand curve is delineated as sloping downward from left to right because price and quantity demanded are inversely related (i.e., the lower the price of a product, the higher the demand or number of sales). This relationship is contingent on certain ceteris paribus (other things equal) conditions remaining constant. Such conditions include the number of consumers in the market , consumer tastes or preferences, prices of substitute goods, consumer price expectations, and personal income. A change in one or more of these conditions causes a change in demand, which is reflected by a shift in the location of the demand curve. A shift to the left indicates a decrease in demand, while a movement to the right an increase. Compare supply curve .

• Market Demand

The consumption of a good or service at different price levels can be depicted for a single consumer using the demand curve . But how do we depict the total consumption for that commodity from all consumers in the market? Read this lesson on Market demand that explains how to calculate and even graphically represent total market demand.

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Consumer’s demand.

In economics, ‘ demand ’ refers to the quantity of a good or service that consumers are willing and able to purchase at a given price. Different from what consumers desire to purchase, demand explains what they are actually able to purchase. Not all desires can be met for the reason that goods are guided by prices in the market. At higher prices, consumers would want to buy less of a good and the reverse is true for lower prices. This relation is the famous law of demand .

Another reason that desires are not the same as actual consumer decisions is that consumers are constrained by their budget . The money income of a consumer will limit his ability to purchase a commodity. Thus, demand expresses both willingness and ability to consume. Willingness is depicted by consumer preferences and ability is depicted by constraints such as money income and prices (budget constraint).

Browse more Topics under Theory Of Consumer Behaviour

• Consumer’s Budget
• Preferences of the Consumer
• Demand Curve and Law of Demand

Individual demand is the demand of a single consumer for a good or service at a given price, with other factors as money income, tastes, and preferences, prices of other goods constant. It can be graphically depicted by a downward sloping demand curve for a single consumer. The curve represents different price-quantity combinations available to a consumer to consume.

Market demand refers to the demand of all consumers of a good or service at a given price, with other factors as money income, tastes, and preferences, prices of other goods constant. It is called ‘ market ’ demand because it depicts the market situation for a good or service. It can be graphically obtained by aggregating the individuals’ consumer demand for a commodity. In simple words, the horizontal summation of all individual demand curves for a good or service gives you the market demand curve.

Market Demand Curve

The pre-requisite for drawing a market demand curve is that all individual demand curves must be known. It is simple to then draw the market demand curve form the market demand schedule . By summing the individual demands at different prices, we can get different price-quantity combinations for the market demand curve.

The law of demand holds for the market demand curve also i.e. it slopes downwards. If the market size is large, it is possible to take a small group of representative consumers and multiply their average quantities by the total number of consumers in the market to obtain the market demand for that good.

Graphical Representation of Market Demand Curve

(Source: Wikipedia)

In the graph above, we assume that there are only two consumers in a market for purposes of understanding. Let them be Person A and Person B. The individual demand curves for A and B can be drawn from their choice of consumption at different prices. The demand curves are drawn in blue and green for A and B respectively. Note that A demands nothing at prices above Rs. 3 so his demand curve coincides with the vertical axis. B demands some quantity at these prices but nothing at Rs. 6. At prices below and equal to Rs. 3, both consumers demand the good (here, bread).

The red curve depicts the market demand, obtained by horizontally summing A and B’s consumption preferences at different prices. For example, A and B demand nothing at Rs. 6 so the demand curve starts from the vertical intercept where price equals 6. At Rs. 5, A demands nothing but B demands 1 unit of bread, so the market demand becomes the sum of both, which is one unit only. Even at Rs.4, B demands something but A does not, so till Rs. 4, the market demand curve coincides with the demand curve of B.

At Rs. 3, A demands 1 unit and B demands 3 units, so the market demand becomes 4 units (by summing). This can be read from the curve at Rs. 3. Similarly, the graph can be read for other price levels. Thus, you can understand how the market demand curve is derived. If the individual demand schedules for consumers are given, you should now be able to sum quantities demanded at different prices and derive the market demand curve.

Solved Example for You

Question: Complete the table below to determine market demand

Solution: We know that Market demand is the horizontal summation of individual demands of a commodity at different prices. Therefore, here, we sum across the rows to obtain market demand for good X at each price.

We have horizontally summed over the quantities demanded by A, B, and C to obtain the required demand of the market.

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Theory of Consumer Behaviour

• Law of Demand and Demand Curve
• Consumer Budget

2 responses to “Consumer Budget”

Awesome explanation

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