Next video:
Loading the player...

The law of demand is one of the most fundamental principles in microeconomics. It's all about how price affects demand.  According to the law of demand, for all other things remaining constant, the lower the price of a good or service, the higher the demand will be. Conversely, the higher the price, the lower the demand.

If you were to graph this relationship with the quantity demanded on the x axis and the price on the y axis, the relationship between price and demand would be a downward sloping curve from left to right. This line is referred to as a demand curve. Movement along the demand curve shows demand expanding or demand contracting.

The people of Loneland are willing to pay $1000 for a computer when there are 2000 computers in the market. However, if the price falls to $500, Loneland people will demand 3000 computers.

This is an example of a change in the demand curve where price is the only variable affecting quantity demanded (or viceversa). In real life, things other than price can affect demand, including income in the economy, price changes in competitive goods, and swings in consumer preferences. This type of change in demand is called a shift of the demand curve.  

Imagine the island of Loneland just discovered a huge reserve of oil underground, and now all of its citizens are considerably richer. In this case, the demand curve for computers would actually shift upwards, since their incomes increased. Demand curves shift based on external factors, rather than the quantity demanded or the price.


Related Articles
  1. Insights

    Explaining Quantity Demanded

    Quantity demanded describes the total amount of goods or services that consumers demand at any given point in time.
  2. Insights

    What is Demand?

    Demand is the economic term for the cumulative wants and desires of consumers as they relate to a particular good or service. Generally speaking, if all other factors remain constant, as demand ...
  3. Insights

    Introduction To Supply And Demand

    Find out all about supply and demand and how it relates to your daily purchases.
  4. Insights

    What Is Equilibrium?

    Equilibrium is a state of balanced supply and demand.
  5. Insights

    Calculating Income Elasticity of Demand

    Income elasticity of demand is a measure of how consumer demand changes when income changes.
  6. Insights

    What is Supply & Demand?

    The law of supply and demand is one of the most basic principles in economics. In simplest terms, the law of supply and demand states that when an item is scarce, but many people want it, the ...
  7. Insights

    Defining Cost-Push Inflation

    Cost-push inflation is caused by an increase in the cost of production, due to higher prices for raw materials or labor.
  8. Investing

    Understanding Term Structure of Interest Rates

    The term structure of interest rates is a common method of valuing bonds.
  9. Investing

    What is Deadweight Loss?

    Deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources.
Hot Definitions
  1. Investing

    The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
  2. Stagflation

    A condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, ...
  3. Notional Value

    The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
  4. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
Trading Center