Question

What does the Law of Demand say?

Answer 1

The Law of Demand states that, ceteris paribus (all else equal), as the price of a good rises, the quantity demanded of that good falls, and as the price falls, the quantity demanded rises. In other words, price and quantity demanded are inversely related, which is why the demand curve slopes downward.

Key points:
- "Ceteris paribus" is crucial: the law holds when other influences on demand (income, tastes, prices of related goods, expectations, etc.) remain constant.
- Reasons for the downward slope: the substitution effect (consumers switch to relatively cheaper alternatives) and the income effect (a price rise effectively reduces purchasing power), plus diminishing marginal utility.
- Distinction: a change in the good’s own price produces a movement along the demand curve; changes in other factors shift the whole demand curve.
- Exceptions/limits: Giffen goods (rare inferior staples where higher price can raise demand), Veblen goods (status goods where higher price increases desirability), necessities with inelastic demand, or cases of strong expectations about future prices.

Simple algebraic form often used: Qd = a − bP (with b > 0), showing quantity demanded falls as price P increases.