Law of Demand Definition and Explained with Examples

Several economists all have had their share in defining the law of demand for economics. However, one that everyone agreed to states that all the other factors remaining constant, there is an inverse relationship between the demand and price of any service or good offered. This means that when the price of a particular service or product increases, the demand for the same decreases, and vice versa.

What Does the Law of Demand State?

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The law of demand is undoubtedly one of the vital concepts in economics and has a significant influence on how the market functions and behaves. It works in relation to the law of supply to further explain how the market economies assign resources and determine the cost of these services and goods. And as mentioned earlier, the law of demand states the inverse relationship between the price and demand of goods and services.

In simpler words, the higher the price is of a commodity, the lower is its demand in the market and vice versa. This happens due to a condition called diminishing marginal utility. Diminishing marginal utility is when consumers purchase the first units of goods to fulfill their urgent needs and further use every additional unit to serve relatively lower valued ends.

The law of demands basically explains consumer choice and behavior in the market when the price of commodity changes. It is natural for any consumer to hesitate to spend more money on a good as they fear running out of cash. This is why when the price of good rises, there is a significant fall in demand for that good, given all the other factors remain the same.

Understanding the Law of Demand:

Economics mainly focuses on the study of market behavior and how consumers use limited means to gratify their unlimited wants, and the law of demand further studies the unlimited wants. Usually, it is seen in the economic behavior of consumers that they prioritize more urgent needs before the relatively less urgent ones. The ranking of goods as per urgency plays a significant role in the choices consumers make amongst the limited means available to them. In any given situation, the purchase of the first unit of any economic good is used to satisfy the most urgent needs of a consumer, which the good can satisfy. However, understanding the law of demand can be quite cumbersome with just explanations, which is why mentioned below is an example that will further help easily understand its role and how it influences the market behavior of consumers.

Consider a person has been stranded in a desert island and found six packs of fresh, bottled water on a shore. The person is going to use the first bottle of water to satisfy the most urgent need he/she feels at that moment, which in this case would be quenching their thirst to avoid dying. The second bottle might be used for washing or cleaning, which is an urgent but relatively less immediate need, and the third bottle for cooking purposes and the last one for low priority needs like watering a plant or lending it to another animal.

In this example, we can clearly see that with the use of each additional bottle, the urgency of the need gets relatively less valued. This means that the stranded person values each consequent water bottle lesser than the one before it. Likewise, when a consumer buys a product, with each additional unit of that product or service, it will be used for a less valued use than the last one. This further reduces the value of every additional unit of the good in the eyes of a consumer. Since they have already satisfied their most urgent needs, the consumer starts hesitating to pay the same price for the good with every additional unit. In other words, the more units of products a consumer buys, the less willing they are to pay in terms of the cost of the product.

The demand for a good or service in a market can be easily calculated, adding up all the units of commodity the consumers are willing to buy at a given price. This calculation helps firms describe the market demand curve. With a price on the Y-Axis and number of units on the X-Axis, the curve shows that with increasing price, the demand of the commodity in the market decreases, and at lower prices, there is more demand.

That being said, it is pretty evident that supply and demand are the two main underlying forces that help in efficiently allocating resources. All market theories are based on these two fundamental moving forces, and all market planning is based on this law.

What are Some Factors Affecting the Demand for a Good?

In today’s market, there are a lot of factors that the demand for a good is dependent on. Even a slight change in these factors can significantly change the position and shape of the demand curve. One of the main changes that affect the curve is the change in income. Rising incomes usually increase the demand for regular economic goods since people are ready to spend more. However, the introduction of a substitute product that is cheaper than the economic good in question can further decrease the demand for the latter. This is because the consumers can then be able to satisfy similar needs and want by spending less, which makes contemporary goods a choice instead.

On the contrary, the increase in available complementary goods tend to increase demand for a good as both the options further are more valuable to the consumer when used together, instead of separately- for example, peanut butter and jelly. Some other factors that affect the demand curve of an economic good are future expectations, changes in environmental conditions, or change in the actual quality of the product as they alter the consumer preferences. Learning the law of demand can prove to be very beneficial for any service provider or company that is looking to increase demand for their offerings.

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