Law of Demand

The law of demand is a foundational economic principle that links the amount of a good demanded to its price. This core concept captures human behavior and buying choices in response to market prices, illustrating how the cost of a good affects people’s willingness to purchase it. Specifically, it describes the connection between a good’s price and the quantity that consumers are inclined to buy. According to this law, there’s an inverse relationship between price and quantity demanded: as the price of a good rises, the quantity demanded typically falls, and when the price drops, consumers are more likely to buy more. This concept is also commonly known as the demand theory.

How does the law of demand work?

The basic idea is that each consumer, when making a purchase, considers the value they get from a good in relation to its price. As a good becomes more expensive, it may seem less affordable or worth the cost compared to other options. This often pushes consumers toward cheaper alternatives or encourages them to cut back. Conversely, if the price drops, the good becomes more attractive and affordable to a larger number of people, driving up demand.

For instance, consider a staple like bread: if the price of a kilogram of bread suddenly jumped from 3 to 5 euros, many households might cut back on their purchases or buy less than usual. On the other hand, if the price fell to 2 euros, more families would likely be inclined to buy larger quantities or even opt for higher-quality varieties they wouldn’t typically choose.

Factors that influence the law of demand

Though the inverse link between price and quantity demanded is a general rule, several factors can affect how this law is observed in real life:

• Consumer preferences
  If a product becomes particularly trendy or is viewed as essential, demand may remain high even if prices rise.
• Consumer income
  A rise in income can make consumers less sensitive to price changes, whereas a drop in income may increase their price awareness.
• Substitute goods
  The availability of alternatives can limit the highest price consumers are willing to pay. For instance, if bread becomes too costly, consumers might turn to substitutes like rice cakes or crackers.
• Future expectations
  If consumers anticipate a price increase, they may choose to buy a good in advance, temporarily raising demand.

Demand theory and marginal utility

The law of demand is closely tied to the concept of marginal utility — the added satisfaction or benefit a consumer gains from buying an additional unit of a good. As the quantity owned rises, marginal utility generally declines, making consumers less inclined to purchase more unless the price falls.

Graphically, the law of demand is shown as the "demand curve," a downward-sloping line that illustrates the inverse relationship between price and quantity demanded. The slope of this curve can vary based on the good’s price sensitivity, or “demand elasticity”, which measures how much quantity demanded shifts with changes in price.