Law of demand

Definition

The law of demand states that, all else being equal, as the price of a good or service decreases, consumer demand for it increases, and vice versa. It is a fundamental principle in microeconomics that describes the inverse relationship between price and quantity demanded.

5 Must Know Facts For Your Next Test

1. The law of demand can be graphically represented by a downward-sloping demand curve.
2. Factors that can shift the demand curve include changes in income levels, consumer preferences, and prices of related goods.
3. The substitution effect and the income effect are two reasons why the law of demand holds true.
4. The concept assumes ceteris paribus, meaning other factors remain constant while analyzing price and quantity demanded.
5. Elasticity of demand measures how much the quantity demanded responds to price changes; goods can be elastic or inelastic.

Review Questions

• How does a decrease in the price of a good affect its quantity demanded according to the law of demand?
• What are some factors that can cause the demand curve to shift?
• Explain how the substitution effect contributes to the law of demand.

Related terms

Demand Curve: A graphical representation showing the relationship between the price of a good and the quantity demanded.

Ceteris Paribus: A Latin phrase meaning 'all other things being equal,' used to isolate variables in economic analysis.

Price Elasticity of Demand: A measure indicating how much the quantity demanded of a good responds to a change in its price.