Law Of Demand

AAA

DEFINITION of 'Law Of Demand'

A microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa. The law of demand says that the higher the price, the lower the quantity demanded, because consumers’ opportunity cost to acquire that good or service increases, and they must make more tradeoffs to acquire the more expensive product.

INVESTOPEDIA EXPLAINS 'Law Of Demand'

The chart below depicts the law of demand using a demand curve, which is always downward sloping. Each point on the curve (A, B, C) reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. 

 

Law Of Demand

 

The law of demand is so intuitive that you may not even be aware of all the examples around you.

-When shirts go on sale, you might buy three instead of one. The quantity that you demand increases because the price has fallen.

-When plane tickets become more expensive, you’re less likely to travel by air and more likely to choose the less expensive options of driving or staying home. The amount of plane tickets that you demand decreases to zero because the cost has gone up.

The law of demand summarizes the effect price changes have on consumer behavior. For example, a consumer will purchase more pizzas if the price of pizza falls. The opposite is true if the price of pizza increases. John might demand 10 pizzas if they cost $10 each, but only 7 pizzas if the price rises to $12, and only 4 pizzas if the price rises to $20.

The law of demand is one of the most fundamental concepts in economics. It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services.

 

VIDEO

RELATED TERMS
  1. Giffen Good

    A good for which demand increases as the price increases, and ...
  2. Law Of Supply

    A microeconomic law stating that, all other factors being equal, ...
  3. Demand Elasticity

    In economics, the demand elasticity refers to how sensitive the ...
  4. Demand

    An economic principle that describes a consumer's desire and ...
  5. Marginalism

    The study of marginal theories and relationships within economics. ...
  6. Economics

    A social science that studies how individuals, governments, firms ...
Related Articles
  1. Law of Demand
    Economics

    Law of Demand

  2. Economics Basics
    Economics

    Economics Basics

  3. Cost-Push Inflation Versus Demand-Pull ...
    Entrepreneurship

    Cost-Push Inflation Versus Demand-Pull ...

  4. Introduction To Supply And Demand
    Economics

    Introduction To Supply And Demand

Hot Definitions
  1. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  2. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  4. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  5. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  6. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
Trading Center