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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.

 

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