Law of Demand

One of the most fundamental aspects in economics is the law of demand. It combines the law of
supply and the law of demand to explain how market economies allocate resources and
determine the pricing of products and services we see in everyday transactions.

According to the law of demand, the amount purchased is inversely proportional to the price. In
other words, the lower the amount requested, the greater the price. Because of diminishing
marginal utility, this happens. That is, customers utilise the first units of an economic good they
buy to meet their most pressing requirements, and then use each additional unit to meet
progressively lower-valued goals.

Key Points

 The law of demand is an economic idea that argues that consumers will demand a less
amount of a commodity with a greater price.
 The law of diminishing marginal utility, which states that consumers use economic
commodities to meet their most pressing wants first, is the source of demand.
 A market demand curve represents the total quantity demanded at each price by all
market consumers.
 Price changes can cause movement along a demand curve, but they cannot increase or
decrease demand on their own.
 Demand evolves in shape and size in response to changes in consumer preferences,
incomes, or associated economic commodities, not in response to price changes.

Understanding the Law of Demand

The subject of economics is concerned with how people use finite resources to meet
unlimited desires. The law of demand is concerned with those desires that are limitless. In
their economic behavior, people naturally priorities more urgent demands and requirements
over less urgent ones, and this extends to how they choose among the limited resources
accessible to them. For any economic good, the first unit that a consumer obtains will be used
to meet the consumer's most pressing need that that good can meet.
Consider a desert island castaway who comes across a six-pack of bottled fresh water washed
up on the shore. The first bottle will be utilised to meet the castaway's most pressing
requirement, which will most likely be drinking water to avoid dehydration. The second
bottle might be used to bathe in order to prevent disease, which is a pressing but not
imminent necessity. The third bottle could be used for a less urgent necessity, such as boiling
some fish for a hot supper, and so on, until the castaway reaches the last bottle, which he uses
for a low-priority task, such as watering a little potted plant to keep him company on the
island.

Because each subsequent bottle of water is utilised for a lower-valued want or need by our
castaway, we can conclude that each additional bottle is valued less than the one before it.
Similarly, when customers buy commodities or services on the market, each extra unit is put
to a less valuable use than the one before it, thus we may say that they value each subsequent
unit less and less. They are willing to pay less for each new unit of the good because they
value it less. As a result, the more units of a good consumers purchase, the lower the price
they are willing to pay.

By adding up all the units of a good that consumers are willing to buy at any given price we
can describe a market demand curve, which is always downward-sloping, like the one shown
in the chart below. 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 low (Q1) and the price is
high (P1). At higher prices, consumers demand less of the good, and at lower prices, they
demand more.
Demand vs Quantity Demanded
In economic thinking, it is important to understand the difference between the phenomenon of
demand and the quantity demanded. In the chart, the term "demand" refers to the green line
plotted through A, B, and C. It expresses the relationship between the urgency of consumer
wants and the number of units of the economic good at hand. A change in demand means a shift
of the position or shape of this curve; it reflects a change in the underlying pattern of consumer
wants and needs vis-a-vis the means available to satisfy them.

On the other hand, the term "quantity demanded" refers to a point along the horizontal axis.
Changes in the quantity demanded strictly reflect changes in the price, without implying any
change in the pattern of consumer preferences. Changes in quantity demanded just mean
movement along the demand curve itself because of a change in price. These two ideas are often
conflated, but this is a common error; rising (or falling) prices do not decrease (or increase)
demand, they change the quantity demanded.

Factors Affecting Demand

So what does change demand? The shape and position of the demand curve can be impacted by
several factors. Rising incomes tend to increase demand for normal economic goods, as people
are willing to spend more. The availability of close substitute products that compete with a given
economic good will tend to reduce demand for that good, since they can satisfy the same kinds of
consumer wants and needs. Conversely, the availability of closely complementary goods will
tend to increase demand for an economic good, because the use of two goods together can be
even more valuable to consumers than using them separately, like peanut butter and jelly.

Other factors such as future expectations, changes in background environmental conditions, or

change in the actual or perceived quality of a good can change the demand curve, because they
alter the pattern of consumer preferences for how the good can be used and how urgently it is
needed.
Simple Explanation of the Law of Demand
The Law of Demand tells us that if more people want to buy something, given a limited
supply, the price of that thing will be bid higher. Likewise, the higher the price of a good, the
lower the quantity that will be purchased by consumers.

 Law of Demand Importance

Together with the Law of Supply, the Law of Demand helps us understand why things are priced
at the level that they are, and to identify opportunities to buy what are perceived to be
underpriced (or sell overpriced) products, assets, or securities. For instance, a firm may boost
production in response to rising prices that have been spurred by a surge in demand.

Can the Law of Demand Be Broken?

Yes, in certain cases an increase in demand does not affect prices in ways predicted by the Law
of Demand. For instance, so-called Veblen goods are things whose demand increases as their
price rises, as these are perceived as status symbols. Similarly, demand for Geffen goods (which
in contrast to Veblen goods are not luxury items) rises when the price rises and falls when the
price falls. Examples of Geffen goods can include bread, rice, and wheat. These tend to be
common necessities and essential items with few good substitutes at the same price levels. Thus,
people may start to hoard toilet paper even as its price goes up.

Law Of Supply

The law of supply is the microeconomic law that states that, all other factors being equal, as the
price of a good or service increases, the quantity of goods or services that suppliers offer will
increase, and vice versa. The law of supply says that as the price of an item goes up, suppliers
will attempt to maximize their profits by increasing the quantity offered for sale.

KEY TAKEAWAYS

 The law of supply says that a higher price will induce producers to supply a higher
quantity to the market.
 Supply in a market can be depicted as an upward sloping supply curve that shows how
the quantity supplied will respond to various prices over a period of time.
  Because businesses seek to increase revenue, when they expect to receive a higher price,
they will produce more.
Understanding the Law Of Supply
The chart below depicts the law of supply using a supply curve, which is upward sloping. A, B,
and C are points on the supply curve. Each point on the curve reflects a direct correlation
between quantity supplied (Q) and price (P). So, at point A, the quantity supplied will be Q1 and
the price will be P1, and so on.

The supply curve is upward sloping because, over time, suppliers can choose how much of their
goods to produce and later bring to market. At any given point in time however, the supply that
sellers bring to market is fixed, and sellers simply face a decision to either sell or withhold their
stock from a sale; consumer demand sets the price and sellers can only charge what the market
will bear.

If consumer demand rises over time, the price will rise, and suppliers can choose devoted new
resources to production (or new suppliers can enter the market) which increases the quantity
supplied. Demand ultimately sets the price in a competitive market, supplier response to the price
they can expect to receive sets the quantity supplied.  
The law of supply is one of the most fundamental concepts in economics. It works with the law
of demand to explain how market economies allocate resources and determine the prices of
goods and services.

Examples of the Law of Supply

The law of supply summarizes the effect price changes have on producer behavior. For example,
a business will make more video game systems if the price of those systems increases. The
opposite is true if the price of video game systems decreases. The company might supply 1
million systems if the price is $200 each, but if the price increases to $300, they might supply 1.5
million systems.

To further illustrate this concept, consider how gas prices work. When the price of gasoline rises,
it encourages profit-seeking firms to take several actions: expand exploration for oil reserves;
drill for more oil; invest in more pipelines and oil tankers to bring the oil to plants where it can
be refined into gasoline; build new oil refineries; purchase additional pipelines and trucks to ship
the gasoline to gas stations; and open more gas stations or keep existing gas stations open longer
hours.

The law of supply is so intuitive that you may not even be aware of all the examples around you:

 When college students learn that computer engineering jobs pay more than English
professor jobs, the supply of students with majors in computer engineering will increase.
 When consumers start paying more for cupcakes than for donuts, bakeries will increase
their output of cupcakes and reduce their output of donuts in order to increase their
profits.
 When your employer pays time and a half for overtime, the number of hours you are
willing to supply for work increases.

What is the best example of the law of supply?

The law of supply summarizes the effect price changes have on a producer’s behavior. For
example, a business will make more of a good (such as TVs or cars) if the price of that product
increases.
What is the law of demand and supply?
Law of demand and supply outlines the interaction between a buyer and a seller of a resource.
The law of demand and supply says that sellers will supply less of a product or resource as price
decreases, while buyers will buy more, and vice versa.

What are the types of law of supply?

There are five types of supply—market supply, short-term supply, long-term supply, joint
supply, and composite supply. Meanwhile, there are two types of supply curves, individual
supply cure and market supply curve. Individual supply curve graphs the individual supply
schedule, while market supply curve represents the market supply schedule.