LAW OF DEMAND: CHARACTERISTICS, FACTORS, CURVE, ELASTICITY - ECONOMY - 2025

The law of demand states that the quantity that is bought of a product varies inversely with the price, as long as the other factors remain the same. That is, the higher the price, the lower the quantity demanded. It is one of the most fundamental concepts in economics.

This occurs due to the decrease in marginal utility. That is, consumers use the first units they buy of an economic good to satisfy their most urgent needs first, using each additional unit of the product to satisfy requirements with less and less value.

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It works with the law of supply to explain how market economies allocate resources. They also determine the prices of products and services that are observed in daily transactions.

There are other things that can affect demand besides price. Tastes or preferences, prices of related goods, income and expectations. For example, if someone really likes Apple products, they won't mind paying a higher price for the latest iPhone phone.

Limited resources for unlimited wishes

The law of demand was documented in 1892 by the economist Alfred Marshall. Since this law is generally consistent with observations made, economists have accepted the validity of the law in most cases.

Economics involves the study of how people use limited resources to satisfy their unlimited wants. The law of demand focuses on those unlimited desires.

In their economic behavior, people prioritize their most urgent wants and needs over the less pressing ones. This translates into how people choose from the limited resources available to them.

Because they value each additional unit of the product less, they will be willing to pay less and less for it. So the more units of a product the consumer buys, the less willing they are to pay in terms of price.

characteristics

- It is a fundamental principle of economics, which establishes that at a higher price, consumers will demand a smaller quantity of a product.

- Demand is derived from the law of diminishing marginal utility, which indicates that consumers use economic goods to satisfy their most urgent needs first.

- Demand is the quantity of a product for which a consumer has the will and also the ability to buy.

- Price changes alone do not increase or decrease demand. The shape and magnitude of demand changes in response to changes in consumer income, preferences, or related economic goods, but not to changes in price.

- The demand is always per unit of time. The time can be a day, a week, a month or a year.

- If you talk about demand without reference to a price, it won't make sense. The consumer must know both the price and the merchandise. Then you can say how much he demands.

-Importance

Price determination

The law of demand is useful for a merchant to set the price of a commodity. He knows how much demand will fall as the price increases at a particular level and how much it will increase as the price of the commodity decreases.

Market demand can provide information on total demand at different prices. This helps management decide how much to increase or decrease the price of the product.

Determination of the tax

This law is of great advantage to the government. If by increasing the tax, the price rises to such an extent that demand is greatly reduced, then raising the tax will not do, because the income will remain almost the same.

The tax will be applied at a higher rate only on those products whose demand is unlikely to fall substantially with the increase in price.

Importance for farmers

Good or bad harvests affect the economic condition of farmers. If a good harvest does not increase demand, the price of the harvest will drop sharply. The farmer will not take advantage of the good harvest and vice versa.

Determinants of the law of demand

There are several factors that establish demand. A change in any of these factors will cause a change in demand.

Graphically, you can see the change in the original demand curve (D1) due to changes in these factors:

For example, if consumers' income decreases, their ability to buy corn falls, the demand curve will shift to the left (D3).

If the future price of corn is expected to rise, demand will shift to the right (D2), as consumers will seek to buy it now, before the price rises.

Tastes or preferences

From 1980 to 2012, Americans' per person chicken consumption increased from 15 kilograms to 37 kilograms annually, while beef consumption fell from 35 kilograms to 26 kilograms annually.

Changes like these are largely due to changes in preferences, changing the quantity demanded of a product for each price.

Composition of the population

A society with more children will have a greater demand for products and services such as tricycles and nurseries.

A society with more elderly people will have a greater demand for nursing homes and hearing aids.

Related product prices

The demand for a product can be affected by changes in the prices of related products, such as substitutes or complementary products.

A substitute is a product that can be used in place of another. A lower price for one substitute decreases the demand for the other product.

For example, as the price of tablets has been falling, the quantity demanded has increased. On the other hand, there has been a decrease in the demand for laptops.

Other products are complementary to each other. This means that the goods are often used together, because the consumption of one good tends to accompany the consumption of the other.

Examples: cereal and milk for breakfast, notebooks and pens, golf balls and clubs, etc.

Future expectations

Expectations about the future can affect demand. For example, if a hurricane is approaching, people can rush to buy flashlight batteries and bottled water.

Demand curve

This curve is a graphic image of the relationship between the price of a service or product and the quantity demanded, during a given period of time.

The demand curve will move from left to right downward, as stated by the law of demand: As the price of the product increases, the quantity demanded decreases.

For example, if the price of corn rises, consumers will have a reason to buy less corn and will substitute other foods for it. This will decrease the quantity of corn demanded.

The market demand curve can be represented by placing all the quantities of the product that consumers are willing to buy at any price. It will always have a downward slope, as shown in the following graph:

Each point on the curve will reflect the quantity demanded (C) for a given price (P).

For example, at point A the quantity demanded is low (C1) and the price is high (P1). With higher prices, the product will be less demanded. With lower prices, more will be demanded.

Demand and quantity demanded

In the graph, the term demand refers to the green line drawn through A, B, and C. It expresses the relationship between the urgency of consumer needs and the number of units of the economic good available.

A change in demand means a change in the position of this curve. It will reflect a change in the pattern of consumer needs with respect to available resources.

On the other hand, the quantity demanded refers to a point on the horizontal axis. Changes in this quantity demanded strictly reflect changes in price, without implying any modification in the pattern of consumer preferences.

Increasing or decreasing prices does not decrease or increase demand, but rather changes the quantity demanded.

Elasticity of demand

It refers to how sensitive the demand for a product is to changes in other economic factors, such as prices or consumer income.

A higher elasticity of demand for an economic variable means that consumers are more receptive to changes in this variable.

Elasticity of demand helps companies model the potential change in demand due to changes in other important market factors.

If the demand for a product is more elastic to changes in other economic factors, companies must be careful to increase prices.

Calculation

It is computed by dividing the percentage difference in the quantity demanded by the percentage difference in another economic variable.

The elasticity of demand is measured in absolute terms. It is elastic if it is greater than 1: demand is sensitive to economic changes such as price.

If it is less than 1 it is inelastic: demand does not change in relation to economic changes.

It will be unit elastic when the value of the elasticity is equal to 1. This means that the demand will change proportionally to the economic changes.

For example, a company calculates that the demand for its soda product increases from 100 to 110 bottles when it decreases its price from $ 2 to $ 1.50 per bottle.

The elasticity of demand is computed as the percentage difference in this quantity demanded ((110–100) / 100 = 10%) divided by the percentage difference in price (($ 2- $ 1.50) / $ 2 = 25%).

The elasticity of demand for this case is: 10% / 25% = 0.4. Since it is less than 1, it is inelastic. Therefore, the change in price has little effect on the quantity demanded.

Types of demand

Individual and market demand

Individual demand can be defined as the quantity demanded by an individual for a product at a particular price and within a specific period of time. It is influenced by the price of the product, the income of the customers, and their tastes and preferences.

On the other hand, the total quantity demanded of a product by all individuals is considered market demand.

This is the sum of the individual demands of all consumers for a product over a period of time at a specific price, as long as other factors are constant.

Business and industrial demand

The demand for a company's products, at a fixed price, at a given time is known as business demand. For example, Toyota is the business demand in the car demand.

The sum total of product demands of all companies in a particular industry is known as industrial demand.

For example, the demand for cars of various brands, such as Toyota, Suzuki, Tata, and Hyundai constitutes industrial demand.

A company can forecast demand for its products only by analyzing industrial demand.

Autonomous and derived demand

The demand for a product that is not associated with the demand for other products is defined as autonomous demand. It arises from the natural desire of an individual to consume the product.

For example, the demand for food, housing, clothing and vehicles is autonomous, as it arises due to the biological, physical, and other personal needs of consumers.

On the other hand, derived demand refers to the demand for a product that arises due to the demand for other products.

The demand for raw materials is a derived demand, because it depends on the manufacture of other products.

Examples of the law of demand

Castaway case

You can consider yourself a castaway on a desert island, getting a six-pack of bottled water on shore.

The first bottle will be used to satisfy the need that the castaway feels most urgently, which is probably to drink the water to avoid dying of thirst.

The second bottle could be used for bathing to avoid disease. A need that is urgent, but less immediate.

The third bottle could be used for a less urgent need, such as boiling some fish for a hot meal.

Thus it reaches the last bottle, which the castaway uses for a lower priority, such as watering a plant in a pot, so that it can keep him company on the island.

As the castaway uses each additional bottle of water to satisfy a desire or need with less and less value to him, it can be said that the castaway values ​​each additional bottle less than the previous one.

Similarly, when consumers buy products in the market, each additional unit that they buy of any product will use it with less value than the previous one. It can be said that they value each additional unit less and less.

Basic products

The products that people need, no matter how high the price, are basic or necessary products. Medications that are covered by insurance are a good example.

An increase or decrease in the price of such a good does not affect its quantity demanded. These products have a perfectly inelastic relationship, since any change in price does not change the quantity demanded.

References

1. Jim Chappelow (2019). Law of Demand. Taken from: investopedia.com.
2. Will Kenton (2019). Demand Curve. Investopedia. Taken from: investopedia.com.
3. Will Kenton (2019). Demand Elasticity. Investopedia. Taken from: investopedia.com.
4. Wikipedia, the free encyclopedia (2019). Law of demand. Taken from: en.wikipedia.org.
5. Economics Concepts (2019). Law of Demand. Taken from: economicsconcepts.com
6. Lumen (2019). The Law of Demand. Taken from: courses.lumenlearning.com.
7. Nitisha (2019). 5 Types of Demand - Explained. Economics Discussion. Taken from: economicsdiscussion.net