What does the law of demand state?
The law of demand is a term used in microeconomics, which states that when other things that affect demand held constant, quantity demand and price of a good or service are inversely related to each other. When a price for a product falls, the demand for the same product increases, and conversely, at a price increase, the quantity demand falls.
The law of demand was documented by the British economist Alfred Marshall in his 1890 book Principles of Economics. Generally, the term “demand” and “quantity demanded” differ in meaning. The term “demand” refers to a certain amount of a product consumers are intended to buy at a given price, thus being based on the consumers’ purchasing power.
The “quantity demanded” is the total number of units purchased at a price. Understanding the law of demand involves graphical representation where demand refers to a curve, while quantity demanded refers to a certain point on the curve. Instruments that are used to reflect the relationship between quantity demanded and price are demand curves and demand schedules.
Generally, the quantity demanded increased as the price falls. However, the law of demand has several exceptions. Such exceptional cases include Giffen goods, Veblen goods, the expectation of future price changes, consumers’ ignorance, emergencies, change in fashion and tastes and preferences, conspicuous necessities, bandwagon effect.
In these cases, the demand curve goes upward sloping, which means that demand grows with the increase in price. On the contrary, the law of demand is valid only under certain assumptions. The most common state that:
- consumer tastes and income should remain constant;
- price of other goods (joint demand) should not alter as well;
- price rise in the future should not be expected.
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