What is the Law of Demand?

The law of demand states that the quantity demanded of a good shows
an inverse relationship with the price of a good when other factors are
held constant (cetris peribus). It means that as the price increases,
demand decreases.

The law of demand is a fundamental principle in macroeconomics. It is

used together with the law of supply to determine the efficient
allocation of resources in an economy and find the optimal price and
quantity of goods.

Factors that Cause a Shift in the Demand Curve

However, we know that demand is not constant over time. As a result, the demand curve constantly
shifts left or right. Depending on the direction of the shift, this equals a decrease or an increase in
demand. There are five significant factors that cause a shift in the demand curve: income, trends and
tastes, prices of related goods, expectations as well as the size and composition of the population. We
will look at each of them in more detail below.

Income

A change in income can affect the demand curve in different ways, depending on the type of goods we
are looking at; normal goods or inferior goods (see also Price Elasticity of Demand).

In the case of a normal good, demand increases as the income grows. That is, an increase in income
shifts the demand curve to the right. The reason for this is that with a higher salary, people can afford to
buy more of any given good. And since people have unlimited wants, more is generally considered
better. For example, students with a low income usually don’t eat at fancy restaurants that often.
However, as their income grows, they are more likely to treat themselves to a nice dinner.

By contrast, in the case of an inferior good, demand decreases as income grows. That means an increase
in income shifts the demand curve to the left. This holds for goods that are usually replaced as income
grows. A common example of an inferior good is bus rides. If people don’t have enough money to buy a
car or pay for a taxi, they have to travel by bus. However, once their income allows them to buy a car,
they don’t need bus rides anymore. Therefore, the demand for bus rides decreases as income increases
and vice versa.