Principles of Economics/Demand Laws

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Demand is represented by a schedule or curve showing the various amounts of a good, resource, or service that consumers are willing and able to purchase at a series of possible prices, other things equal. It reflects the relationship between the possible price of a product and the quantity of product that the consumer would be willing and able to purchase at each price.

The Law of Demand is as follows: All else equal, as price falls, the quantity demanded for a product will rise whereas as the price rises, the quantity demanded for a product will fall. In other words, price and quantity have an inverse relationship. This can be gathered by common sense, if the price of a product is high, people will be less inclined to buy the product than they would if the price of the product was low. Conversely, if the price of a product is low, people will be more likely to purchase the product and more likely to purchase a higher quantity of the product than they would if the price of the product was high.

Income effect[edit]

A lower price or a higher income increases the purchasing power of a buyer's money income, allowing the buyer to purchase more of the product than he or she could buy before.

Substitution effect[edit]

As the price of the good falls, buyers have an incentive to substitute this good for other now relatively more expensive goods. For example, if the price of apples falls relatively to the price of oranges, the purchasing power of consumers increase for apples, causing them to substitute apples for oranges.

Normal and inferior goods[edit]

Normal goods are those goods that consumers demand more of as income increases. Inferior goods are those goods that consumers demand less of as income increases, often because they are lower-quality substitutes for normal goods. As buyers gain purchasing power, they shift toward buying normal goods and away from inferior goods.

Diminishing returns[edit]

However, the Law of Demand is also subject to the Law of Diminishing Marginal Utility which states that in any specific period of time, each buyer of a product will derive less utility from each successive unit of the good consumed, which means that as price falls, the quantity of product consumed will rise at a decreasing rate.