What's the law of demand? And why it's true?

I was aware of the law of demand before learning Economics, but didn't know there are even some interesting explanations :-)



The law of demand: All else equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls.



Why there is such an inverse relationship between price and quantity demanded? Three explanations:

1. It's consitent with common sense. Price is an obstacle that deters
consumers from buying, the fact that business have "sales" is evidence
of their belief in the law of demand.

2. In any specific time period, each buyer of a product will derive
less satisfaction (or benefit, or utility) from each successive unit of
the product consumed. The second ipod will yield less satisfaction to
the consumer than the first, and the thrid still less than the second.
That is, consumption is subject to diminishing marginal utility, so
consumers will buy additional units only if the price of those units is
progressively reduced.

3. The law of demand can also be explained in terms of income and
substitution effects: A lower price increases the purchasing power of a
buyer's money income, enabling the buyer to purchase more of the
product than she or he could buy before.  At a lower price buyers
have the incentive to substitute what is now a less expensive product
for similar products that are now relatively more expensive.

For example, a delcine in the price of chicken will increase the
purchasing power of consumer incomes, enabling people to buy more
chicken (the income effect). At a lower price, chicken is relatively
more attractive and consumers tend to substitute it for pork, lamb,
beef, and fish (the substitution effect).

Posted at 10:58AM Oct 29, 2006 by byuan in Economics  |  Comments[1]