Law Of Demand

Published Dec 31, 2022

Definition of Law of Demand

The law of demand states that all other things equal, the quantity demanded of a good or service is inversely related to its price. That means when the price of a good or service increases, the quantity demanded of it decreases, and vice versa.

Example

To illustrate this, let’s look at the example of a popular video game. Let’s assume that the game is priced at USD 50.00. At this price, the quantity demanded of the game is high, and the store can barely keep it in stock. Now, if they decide to put the game on sale and offer it for USD 30.00, more people will want to buy it because they feel like they are getting a great deal, and the quantity demanded increases.

By contrast, if the store were to increase the price of the game to USD 200.00, the quantity demanded would decrease significantly. At this price, most people (probably even hardcore gamers) would think the game is too expensive and decide not to buy it.

Why the Law of Demand Matters

The law of demand is a fundamental and critically important concept in economics because it helps to explain how prices and quantities are determined in a market economy (similar to the law of supply). It is also a useful tool for businesses because it can help them to set prices for their products and services. By understanding the law of demand, they can adjust their prices to maximize profits. In addition to that, the law of demand can also be used to predict how changes in prices will affect the demand for a good or service (see also law of supply and demand).