The Law of Demand is a term used in Microeconomics which states that all other factors being equal, as the price of a product or service increases, the consumer demand for it decreases, and vice versa.

What is Demand?

Demand, as used in Economics, describes not just the consumer’s intent of paying a certain price for a product a service, but also his ability to pay for it. Intention and ability to pay may be differentiated – One may be intending to buy a new car but may not be able to pay the existing market price for it.

Thus, in this case, the demand may be said to be missing. Both the intent to buy and the ability to pay for it need to be present for Demand to exist.

Factors Assumed Constant

In the definition of Law of Demand, the factors that are considered unchanged are generally the price of other goods and the disposable income of the individual, among others. Change in prices of competitor goods may cause a change in the demand for a product.

Similarly, the change in the disposable income of an individual may also have an impact on the demand for a particular product. There are other factors like population size, an expectation of future change in prices, and tastes and preferences of the customers which are also assumed constant.

The Demand Curve

The Demand Curve is a graphical representation of the Law of Demand. The Y-Axis denotes the Price and the X-Axis denotes the Quantity Demanded. It slopes downward because the Price and the Quantity Demanded have an inverse relationship – that is, if the Price increases, the Quantity Demanded reduces, and vice versa. From the diagram, it can be noted that Q1 is the Quantity Demanded at a Price P1:

  • As Price reduces from P1 to P2, the Quantity Demanded increases from Q1 to Q2
  • As Price increases back from P2 to P1, the Quantity Demanded reduces from Q2 back to Q1

Change in Demand

Demand may be impacted by some other factors which are held constant in the Law of Demand such as change in the price of competitor products and change in income of the individual. Since these factors are not plotted on the graph of the Demand Curve, any change in them may cause a shift in the demand curve.

A Change in Demand is different from a change in Quantity Demanded, as depicted above. A change in Quantity Demanded is a movement along the curve as Price or Quantity increased or decreased. A Change in Demand is depicted by an entire shift in the demand curve.

Exceptions to the Law of Demand

There are some cases where the Law of Demand is not applicable, some of which are:

  • Basic or necessary goods like medicines or staple food like rice and potato may not be impacted much by the changes in price to a large extent
  • Emergency Situations like famine, war, etc. are times during which the natural operation of the Law of Demand gets suspended and consumers’ buying behavior becomes abnormal
  • Expectation of future changes in prices may induce the customer to purchase even larger quantities of a product whose prices have increased, in expectation that it may further increase tomorrow.
  • Premium Goods warp consumer buying behavior where an association of higher price with higher quality, or the factor of exclusivity may induce a consumer buy more in case of an increase in price. A good example of this would be the premium passenger car segment
  • Change in Fashion may also have an impact on consumer demand irrespective of the change in price of a particular product