The Law of Demand

The law of demand is one of the fundamental concepts of economics. It demonstrates the relationship between the price and the amount of products or services people are willing to purchase. Economists formulate this law as the following: while all other factors remain constant and/or equal, if the price for a product or service increases, then consumer demand for such product or service will decrease; and conversely, if the price goes down, then consumer demand will increase.

In other words, the law of demand describes the effects of price changes on consumer behavior. Undoubtedly, every consumer wants to buy goods for the lowest price. That is why many sellers frequently organize different sales or discount programs in order to attract more and more customers, increase the demand and sell as much as possible. It may seem like the sellers must be interested in setting higher prices for their goods and trying to make the biggest profits from every item. But it is not true, because the higher prices go, the less people can afford buying the product or service.

Certainly, everyone can observe how the law of demand works in our daily life. I am fond of music and I regularly buy CDs for my collection. As a rule, every month I buy 4 CDs for about $15 each, spending $60 in total. If the price for CDs becomes $12 , I will be able to buy 5 CDs (instead of 4) for the same money. Therefore, my demand will increase. Besides, if the price drops down to $10, I would not just be able to afford 6 CDs for the money I usually spend for CDs. Moreover, I can also save some money (for example, by buying less coffee or donuts) and probably buy couple of more CDs because they got cheaper.

There’s another example. I like pizza very much, but I can’t afford buying it every day for my lunch, so usually I buy some other food. In case if the price for pizza drops, I (as well as the majority of my friends and thousands of other students) will definitely start buying pizza in our college cafeteria very often. Correspondently, if the prices for pizza go higher, nobody will buy it and demand will decrease, because there are numerous other types of food to buy for lunch (i.e. cakes, donuts, pies, sandwiches, and so on).

These examples also illustrate other economic effects which are closely connected with the law of demand: income effect and substitution effect. If the price for CDs decreases and I can buy more CDs for the same amount of money, I will feel myself richer and able to get more goods for the money I have at my disposal.  At the same time, in case if the prices for pizza in our cafeteria decrease, the students will have a strong tendency to substitute the food they usually buy for lunch for pizzas.

In conclusion, it is also necessary to explain what “other factors” in the early mentioned law of demand are supposed to be equal or constant. Those are actually the issues and conditions which directly influence consumer demand, including tastes and preferences of the customers, their incomes and expectations, prices for related products and products-substitutes, available information about the goods, time necessary for consumption of the goods, fashion and social trends, economic stability and market tendencies, and other factors.