The law of demand posits a negative relationship between the price of a good and quantity demanded if all other factors are held constant. This cornerstone of microeconomics explains that consumers of a good or service will consume more if the price is lower. In reference to popular graphical representations of demand, the law of demand indicates movement along a demand curve rather than a shift in the demand curve. A shift in the demand curve results from a change in income level or changes to the prices of substitute goods.
Pricing and Promotion Based on Law of Demand
Sellers of consumer products base pricing and promotional strategy on the law of demand. According to a 2012 report by the Food Marketing Institute, over half of grocery customers in the United States were willing to accept living with less in response to difficult economic conditions. Grocery customers implicitly would prefer to consume more but are limited by price. Promotional grocery pricing frequently offers discounted prices on the condition that a certain number of items are purchased. The existence and success of this promotional pricing model exemplifies consumer willingness to purchase higher quantities at lower prices.
Source: OpenStax College
The chart above shows that as price rises, quantity demanded decreases, and vice versa. These points are then graphed, and the line connecting them is the demand curve (D). The downward slope of the demand curve again illustrates the law of demand—the inverse relationship between prices and quantity demanded.
Auto fuel consumption has an inelastic component, though people alter non-essential driving habits if gasoline prices become too high. Gasoline prices in the U.S. rose significantly in the second half of 2011, with national average prices approaching $4 per gallon. Though gasoline consumption had been falling since the start of the 2008 recession due to reduced expected income, the trend accelerated in response to the high prices in late 2011. This effect was especially clear in California, where fuel prices were among the highest in the country. Controlling for the effects of changing incomes, rising gasoline prices caused consumers to demand a lower quantity of that good.
Price Decrease Can Increase Demand
Consider a hypothetical scenario in which tickets for a sporting event are being sold by scalpers on the secondary market. Suppose the scalpers expect the game will be highly attended and are charging $200 per ticket. For many people, this price point is too high to justify. As the start of the game approaches, the scalpers realize they were wrong about projected attendance. The quantity demanded at $200 is not sufficient to sell out the game. The ticket price on the secondary market drops to $50, and more people are willing to meet this price to see the game. The change occurred because the price level was altered by ticket suppliers, and consumers responded to a change in price only.
Suppose the game had sold out at $200, but it was announced shortly before game time that the star player would miss the game due to injury. If interest in the game declined as a result, causing the existing ticket holders to sell tickets at a discounted price, this would represent a shift in the demand curve. Both the ticket price and quantity demanded would decline due to external factors. This alternative scenario is not an example of the law of demand. (For related reading, see: Are there any exceptions to the law of demand?)