Loading the player...

What is the 'Law of Demand'

The law of demand states that quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded. The reason for this phenomenon is that consumers' opportunity cost increases, so they must give something else up or switch to a substitute product.

BREAKING DOWN '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 the quantity demanded (Q) at a given price (P). At point A, for example, the quantity demanded is Q1 and the price is P1.

Law Of Demand

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.

The Law of Demand in Practice

The "curve" above is simplified as a straight line, but in fact the shape of the curve varies by product. Demand curves are generally concave, reflecting the fact that consumers can become saturated with a given product: How many pairs of underwear can you wear, or cars can you park in your garage? 

It's important to make a distinction between temporary and longer-term price changes, particularly in online shopping with its fine-grained price changes. Consumers might buy more of an item on temporary discount to 1) stock up on nonperishables they will need before the items go on sale again (shirts, for example), 2) make a long-planned purchase at a lower price (a big screen television), 3) get the current model of a product before a new model is released (cars or smartphones), or 4) on impulse.

For longer-term prices, consumers will prefer more quantity at lower prices. The question is whether falling costs enable those lower prices that consumers prefer. This leads to the interaction with the law of supply and the supply curve. In the U.S., the average price of goods, excluding food and fuel, has been falling since 1995 due to technological innovation and globalized trade's downward pressure on costs.

By contrast, prices of services that are provided locally, provided on an individual basis and subject to regulation, tend to be increasing. Examples include dental services and nail salons.

RELATED TERMS
  1. Demand Curve

    The demand curve is a representation of the relationship between ...
  2. Change In Supply

    A change in supply is a term used in economics to describe a ...
  3. Supply Curve

    A supply curve is a representation of the relationship between ...
  4. Consumer Surplus

    An economic measure of consumer satisfaction, which is calculated ...
  5. Pricing Power

    An economic term referring to the effect that a change in a firm's ...
  6. Normal Yield Curve

    The normal yield curve is a yield curve in which short-term debt ...
Related Articles
  1. Insights

    Introduction to Supply and Demand

    Learn about one of the most fundamental concepts of economics - supply and demand - and how it relates to your daily purchases.
  2. 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 ...
  3. Investing

    The impact of an inverted yield curve

    Understand how the relationship between short- and long-term interest rates contributes to an inverted yield curve – a noteworthy economic event.
  4. Investing

    Interest Rates and Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  5. Insights

    Why We Splurge When Times Are Good

    The concept of elasticity of demand is part of every purchase you make. Find out how it works.
  6. Insights

    Is a Recession in the Works? Ask an Inverted Yield Curve

    An inverted yield curve has predicted the last seven recessions. Is number eight around the corner?
  7. Investing

    One Thing The Yield Curve Says About Stocks

    Contrary to media hype, a flattening yield curve does not mean a recession is coming soon.
  8. Insights

    Understanding the Substitution Effect

    The substitution effect is an economic term used to describe consumer behavior relative to price or income changes.
RELATED FAQS
  1. What are some examples of the law of demand in real markets?

    Find out how the price of a good or service affects the quantity demanded, and explore instances of consumption reflecting ... Read Answer >>
  2. Why are price and quantity inversely related according to the law of demand?

    Discover why the cost of a good is inversely correlated to its quantity demanded according to the law of demand in microeconomic ... Read Answer >>
  3. What's the difference between regular supply and demand and aggregate supply and ...

    Understand how businesses use supply and demand and aggregate supply and demand to forecast economic activity. Learn about ... Read Answer >>
  4. Why is there a negative correlation between quantity demanded and price?

    Learn what the law of demand is, the basic assumption of the law of demand and why there is a negative correlation between ... 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. How can Economic Order Quantity be used to lower inventory costs?

    Learn what economic order quantity is, how it is calculated and how to find the optimal economic order quantity to minimize ... Read Answer >>
Hot Definitions
  1. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  2. 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 ...
  3. 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 ...
  4. 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.
  5. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  6. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
Trading Center