According to economic theory, the law of demand states that the relative demand for a good or service is inversely correlated with the cost associated with acquiring it. This law is commonly expressed as a function of money prices, but the law of demand would hold true even if no money existed. The law of demand flows logically from two "a priori" epistemological statements: that resources are scarce, and that human beings employ those scarce resources to achieve purposeful ends. These are the only "factors" that influence the law of demand. However, many other factors can influence specific instances of demand.

Defining Demand

The quantity demanded of a good or service is defined by the number of consumers who will trade for it at its current cost. As those costs rise, consumers will demand less of it than they otherwise would have. When costs drop, consumers will demand more of it than they otherwise would have.

This makes the law of demand relative, not absolute. Consider a scenario where the price of a blue hat rises from $20 to $30. If no other factors change, then consumers buy fewer blue hats at the higher price. What happens if, at the same time, the government passes a law requiring all people to wear blue hats? The sale of blue hats is likely to increase even with the price change.

Factors That Influence the Demand for a Good or Service: An Example

That blue hat scenario highlighted two important factors that can influence demand: the price and government policy (regulation, fiscal policy and monetary policy). Economists have identified other factors as well, including consumer income, consumer tastes, the price of substitute goods, the number of consumers in the market and expectations about the future.

Suppose a consumer is considering purchasing a dinner at a fancy restaurant.

The dinner will cost him $100. Ultimately, according to the subjective theory of value, he'll pay for the dinner if he values the food and dining experience more than the $100. That valuation will never be constant -- it will change from time to time based on many circumstances.

First, the consumer has to have $100 to spend. His income and level of savings are important. If he only has $100 to his name, it's unlikely that he wants to waste it on an expensive meal. Alternatively, if he's a millionaire then he likely values the $100 less.

The rational theory of expectations means his expectations are also important. What if he doesn't value the food so much but believes that his date will really like the experience? What if the restaurant gets terrible reviews from the community or recently failed a code violation?

He must also consider the substitutes available to him. He's less likely to demand that dinner if there is another fine dining experience of equal quality available for $80 next door. That restaurant might be full, though, because there are lots of other consumers with similar tastes. What if there are no other food options available for miles and the consumer is dying of starvation?

At the microeconomic level, demand is a function of all these factors at once. Movements in these factors change the total subjective cost that consumers face before making a decision about whether to trade.

  1. Are there any exceptions to the law of demand?

    Learn more about the law of demand and if exceptions exist for different products. Find out more about how price elasticity ... Read Answer >>
  2. Which economic factors most affect the demand for consumer goods?

    Understand how key economic factors such as inflation, unemployment, interest rates and consumer confidence affect the level ... Read Answer >>
  3. What are some examples of inelastic goods and services that are not affected by the ...

    Find out how the laws of supply and demand function for goods and services considered highly inelastic, including goods not ... Read Answer >>
  4. Is demand or supply more important to the economy?

    Learn more about the impact of supply and demand in an economy. Find out why companies study supply and demand as part of ... Read Answer >>
  5. Is there an easy way to calculate the law of supply and demand for small business?

    Understand how small businesses make basic calculations of law of supply and demand principles and how supply and demand ... Read Answer >>
  6. Do the laws of supply and demand ever not apply to markets?

    Learn about the laws of supply and demand in a market-based economy, and how they can be distorted by regulation, monopolies ... Read Answer >>
Related Articles
  1. Investing

    Red Hat: Why This Stock Is The Comeback Kid

    Red Hat was buoyed by a first-quarter earnings beat and an upgrade of its stock.
  2. Investing

    Red Hat Guides High, Driven by Public Cloud

    Shares of the software provider hit new highs on current-quarter and full-year 2018 guidance beats.
  3. Personal Finance

    Top 7 Money Saving Tips for Eating Out

    Discover seven money-saving options available to consumers who are looking to partake in the luxury of dining out while cutting down on cost.
  4. Insights

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  5. Investing

    Calculating Cross Elasticity of Demand

    Cross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
  6. Investing

    Where Are Consumers Spending Their Gas Savings?

    The recent plunge in gas prices is putting extra cash in consumers' pockets.
  7. Small Business

    Why Do Many Restaurants Fail In Their First Year?

    Too many restaurant ventures will fail in their first year. What can entrepreneurs do to avoid such a fate for their startups?
  8. Insights

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  9. Trading

    Forces That Move Stock Prices

    You can't predict exactly how stocks will behave, but knowing what affects prices will put you ahead of the pack.
  1. Law of Supply and Demand

    The law of supply and demand explains the interaction between ...
  2. Law of Demand

    The law of demand states that quantity purchased varies inversely ...
  3. Marginal Cost Of Production

    Marginal cost of production is the change in total cost that ...
  4. Demand Shock

    A sudden surprise event that temporarily increases or decreases ...
  5. Demand Schedule

    In economics, the demand schedule is a table of the quantity ...
  6. Substitution Effect

    The substitution effect is the idea that as prices rise (or incomes ...
Hot Definitions
  1. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  2. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  3. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  4. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  6. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
Trading Center