Law of Demand: Definition and Examples

The law of demand is an economic theory that governs the demand for goods at a given price. The law of demand states that the price of a good and the quantity demanded have an inverse relationship. When the price of a good rises, there will be less demand for that good, and conversely, when the price decreases, there will be more demand for that good. When applying this economic principle in microeconomics and macroeconomics, economists assume that only the price changes and all other variables that can affect demand (such as the consumer’s income or preferences) remain constant.

The law of demand is closely linked to the law of supply, which states that when the market price of a good increases, suppliers will increase the supply of that good, and vice versa. The difference is that the law of demand focuses on the consumer’s response to changes in price (whether they demand more or less of a good), while the law of supply focuses on the supplier’s response to changes in price (whether they try to sell more or less of a good). When economists discuss these concepts together, they often refer to them as the law of supply and demand.

The consumer demand curve—a graph representing the link between the cost of a good and consumer demand—shows quantity (the dependent variable) on the horizontal axis (x-axis) and price (the independent variable) on the vertical axis (y-axis). The law of demand is shown as a downward slope, called the market demand curve, which demonstrates that as the price of a good falls, demand increases. The law of supply is shown as an upward slope, called a supply curve, which demonstrates that price increases lead suppliers to offer higher quantities. These two slopes intersect at the market equilibrium point (also called the equilibrium price), which represents the point at which the demand for a product and the supply are equal.

The real-world application of the law of demand is seen in how the demand for a given good changes as the price of a product changes.

1. 1. Price falls, demand increases: A grocery store typically sells apples for one dollar each. One day they decide to have a sale on apples and lower the price to fifty cents each. The law of demand theorizes that the lower price would encourage more people to buy apples, including those who wouldn’t normally buy them at the higher price.
2. 2. Price rises, demand decreases: A car dealership makes the decision to raise the prices of trucks to earn more profits on their sales. The law of demand states that fewer people will now buy trucks at this new, higher price point.
3. 3. Price remains constant, demand remains constant: A coffee shop has tested many different price points for their coffee and has determined that they make the most profit selling a cup of coffee at one dollar each, with demand remaining high at that price. The price of their cup of coffee remains the same, and demand remains the same.

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