In this article, you’ll learn about What is Law of Demand? Definition, Exceptions, Assumptions and more.

What is the Law of Demand?

The Law of Demand is a fundamental principle in economics that describes the inverse relationship between the price of a good or service and the quantity demanded of that good or service. In simpler terms, as the price of a product increases, the quantity demanded by consumers typically decreases, and vice versa, when all other factors remain constant.  

Law of Demand Example

Imagine the price of coffee decreases. Consumers are likely to buy more coffee at the lower price, leading to an increase in the quantity demanded. Conversely, if the price of coffee increases, consumers may buy less coffee, leading to a decrease in the quantity demanded.  

Law of Demand Definition

The Law of Demand states that, “ceteris paribus,” as the price of a good or service increases, the quantity demanded of that good or service decreases, and vice versa.  

Law of Demand Meaning

The Law of Demand reflects the basic economic principle that consumers tend to maximize their utility (satisfaction) within their budget constraints. When the price of a good decreases, it becomes more affordable relative to other goods, making it more attractive to consumers.  

Assumptions of Law of Demand

The Law of Demand holds true under certain assumptions:

• No expectation of future price changes or shortages: Consumers are assumed to be making purchasing decisions based on current prices and not anticipating future price increases or shortages.
• No change in consumer’s preferences: Consumer tastes and preferences are assumed to remain constant.  
• No change in the price of related goods: The prices of substitute and complementary goods are assumed to remain unchanged.
• No change in consumer’s income: Consumer incomes are assumed to remain constant.  
• No change in size, age composition and sex ratio of the population: The demographic characteristics of the consumer market are assumed to remain unchanged.
• No change in the range of goods available to the consumers: Consumers are assumed to have the same range of goods available to choose from.
• No change in government policy: Government policies related to taxes, subsidies, and regulations are assumed to remain unchanged.

Exception of Law of Demand

While generally true, there are some exceptions to the Law of Demand:

• Giffen goods: These are inferior goods for which demand increases as the price increases. This occurs when the income effect outweighs the substitution effect.  
• Articles of distinction goods (Veblen goods): These are luxury goods whose demand increases as the price increases due to their prestige and status symbol value.  
• Consumers ignorance: If consumers are unaware of a price decrease, they may not increase their demand.  
• Situations of crisis: During emergencies or crises, consumers may panic buy, leading to increased demand even at higher prices.  
• Future price expectations: If consumers expect prices to rise significantly in the future, they may increase their current demand to avoid paying higher prices later.  

Characteristics of Law of Demand

• Inverse Relationship: The core characteristic is the inverse relationship between price and quantity demanded.  
• Price independent and Demand dependent variable: Price is the independent variable, and quantity demanded is the dependent variable.
• Other things being equal: The law holds true only under the assumption of “ceteris paribus” (all other factors remaining constant).  
• Qualitative statement: The law of demand primarily describes a qualitative relationship between price and quantity demanded.
• Concerned with certain period of time: The law of demand applies within a specific time period, as consumer preferences and market conditions can change over time.

Conclusion

The Law of Demand is a fundamental concept in economics that provides a framework for understanding how price influences consumer behavior. While there are some exceptions, the law generally holds true and plays a crucial role in market dynamics and economic decision-making.