law of demand homework answers

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AP®︎/College Macroeconomics

Course: ap®︎/college macroeconomics   >   unit 1, law of demand.

• Price of related products and demand
• Change in expected future prices and demand
• Changes in income, population, or preferences
• Normal and inferior goods
• Change in demand versus change in quantity demanded
• Lesson summary: Demand and the determinants of demand

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Video transcript

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What Is the Law of Demand?

Understanding the law of demand, demand vs. quantity demanded, factors affecting demand, law of supply.

• Frequently Asked Questions

The Bottom Line

• Guide to Microeconomics

What Is the Law of Demand in Economics, and How Does It Work?

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

• A Practical Guide to Microeconomics
• Economists' Assumptions in their Economic Models
• 5 Nobel Prize-Winning Economic Theories
• Understanding Positive vs. Normative Economics
• What Factors Influence Competition in Microeconomics?
• How Does Government Policy Impact Microeconomics?
• Understanding Microeconomics vs. Macroeconomics
• Differentiate Between Micro and Macro Economics
• Microeconomics vs. Macroeconomics Investments
• Introduction to Supply and Demand
• Is Demand or Supply More Important to the Economy?
• Law of Demand CURRENT ARTICLE
• Demand Curve
• Law Of Supply
• Supply Curve
• Price Elasticity of Demand
• Understanding Elasticity vs. Inelasticity of Demand
• Factors Determining the Demand Elasticity of a Good
• What Factors Influence a Change in Demand Elasticity?
• What Is the Concept of Utility in Microeconomics?
• What Is the Utility Function and How Is it Calculated?
• Total Utility
• Marginal Utility
• Law Of Diminishing Marginal
• What Does the Law of Diminishing Marginal Utility Explain?
• Economic Equilibrium
• Income Effect
• Indifference Curve
• Consumer Surplus
• Comparative Advantage
• Economies of Scale: What Are They and How Are They Used?
• Perfect Competition
• Invisible Hand
• Market Failure

The law of demand is one of the most fundamental concepts in economics. Alongside the law of supply , it explains how market economies allocate resources and determine the prices of goods and services.

The law of demand states that the quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded. This occurs because of diminishing marginal utility . That is, consumers use the first units of an economic good they purchase to serve their most urgent needs first, then they use each additional unit of the good to serve successively lower-valued ends.

Key Takeaways

• The law of demand is a fundamental principle of economics that states that at a higher price, consumers will demand a lower quantity of a good.
• Demand is derived from the law of diminishing marginal utility, the fact that consumers use economic goods to satisfy their most urgent needs first.
• A market demand curve expresses the sum of quantity demanded at each price across all consumers in the market.
• Changes in price can be reflected in movement along a demand curve, but by themselves, they don't increase or decrease demand.
• The shape and magnitude of demand shifts in response to changes in consumer preferences, incomes, or related economic goods, not usually to changes in price.

Economics involves the study of how people use limited means to satisfy unlimited wants. The law of demand focuses on those unlimited wants. Naturally, people prioritize more urgent wants and needs over less urgent ones in their economic behavior, and this carries over into how people choose among the limited means available to them.

For any economic good, the first unit of that good that a consumer gets their hands on will tend to be used to satisfy the most urgent need the consumer has that that good can satisfy.

For example, consider a castaway on a desert island who obtains a six-pack of bottled fresh water that washes up onshore. The first bottle will be used to satisfy the castaway’s most urgently felt need, which is most likely drinking water to avoid dying of thirst.

The second bottle might be used for bathing to stave off disease, an urgent but less immediate need. The third bottle could be used for a less urgent need, such as boiling some fish to have a hot meal, and on down to the last bottle, which the castaway uses for a relatively low priority, such as watering a small potted plant to feel less alone on the island.

Because each additional bottle of water is used for a successively less highly valued want or need by our castaway, we can say that the castaway values each additional bottle less than the one before.

The more units of a good that consumers buy, the less they are willing to pay in terms of price.

Similarly, when consumers purchase goods on the market, each additional unit of any given good or service that they buy will be put to a less valued use than the one before, so we can say that they value each additional unit less and less. Because they value each additional unit of the good less , they aren't willing to pay as much for it.

By adding up all the units of a good that consumers are willing to buy at any given price, we can describe a market demand curve , which is always sloping downward, like the one shown in the chart below. Each point on the curve (A, B, C) reflects the quantity demanded (Q) at a given price (P). At point A, for example, the quantity demanded is low (Q1) and the price is high (P1). At higher prices, consumers demand less of the good, and at lower prices, they demand more.

In economic thinking, it is important to understand the difference between the phenomenon of demand and the quantity demanded. In the chart above, the term “demand” refers to the light blue line plotted through A, B, and C.

It expresses the relationship between the urgency of consumer wants and the number of units of the economic good at hand. A change in demand means a shift of the position or shape of this curve; it reflects a change in the underlying pattern of consumer wants and needs vis-à-vis the means available to satisfy them.

On the other hand, the term “quantity demanded” refers to a point along the horizontal axis. Changes in the quantity demanded strictly reflect changes in the price, without implying any change in the pattern of consumer preferences.

Changes in quantity demanded just mean movement along the demand curve itself because of a change in price. These two ideas are often conflated, but this is a common error—rising (or falling) prices don't decrease (or increase) demand; they change the quantity demanded .

So what does change demand? The shape and position of the demand curve can be affected by several factors. Rising incomes tend to increase demand for normal economic goods, as people are willing to spend more. The availability of close substitute products that compete with a given economic good will tend to reduce demand for that good because they can satisfy the same kinds of consumer wants and needs.

Conversely, the availability of closely complementary goods will tend to increase demand for an economic good because the use of two goods together can be even more valuable to consumers than using them separately, like peanut butter and jelly.

Other factors such as future expectations, changes in background environmental conditions, or changes in the actual or perceived quality of a good can change the demand curve because they alter the pattern of consumer preferences for how the good can be used and how urgently it is needed.

Supply is the total amount of a specific good or service that is available to consumers at a certain price point. As the supply of a product fluctuates, so does the demand, which directly affects the price of the product.

The law of supply, then, is a microeconomic law stating that, all other factors being equal, as the price of a good or service rises, the quantity that suppliers offer will rise in turn (and vice versa). When demand exceeds the available supply, the price of a product typically will rise. Conversely, should the supply of an item increase while the demand remains the same, the price will go down.

What is a Simple Explanation of the Law of Demand?

The law of demand tells us that if more people want to buy something, given a limited supply, the price of that thing will be bid higher. Likewise, the higher the price of a good, the lower the quantity that will be purchased by consumers.

Why Is the Law of Demand Important?

Together with the law of supply, the law of demand helps us understand why things are priced at the level that they are, and to identify opportunities to buy what are perceived to be underpriced (or sell overpriced) products, assets, or securities . For instance, a firm may boost production in response to rising prices that have been spurred by a surge in demand.

Can the Law of Demand Be Broken?

Yes. In certain cases, an increase in demand doesn't affect prices in ways predicted by the law of demand. For instance, so-called Veblen goods are things for which demand increases as their price rises, as they are perceived as status symbols. Similarly, demand for Giffen goods (which, in contrast to Veblen goods, aren't luxury items) rises when the price goes up and falls when the price falls. Examples of Giffen goods can include bread, rice, and wheat. These tend to be common necessities and essential items with few good substitutes at the same price levels.

The law of demand posits that the price of an item and the quantity demanded have an inverse relationship. Essentially, it tells us that people will buy more of something when its price falls and vice versa.  When graphed, the law of demand appears as a line sloping downward.

This law is a fundamental principle of economics. It helps to set prices, understand why things are priced as they are, and identify items that may be overpriced or underpriced.

University of Southern Philippines Foundation. " Law of Demand ," Page 1.

Econlib. " Demand ."

University of Pittsburgh. " Supply and Demand ," Page 1.

University of Pittsburgh. " Supply and Demand ," Page 3.

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Law of Demand – Definition, Explanation

The law of demand states that ceteris paribus (other things being equal)

• If the price of good rises, then the quantity demanded will fall
• If the price of a good falls, then the quantity demand will rise.

At point (A) Price is £1.20 and the quantity demand is 40,000 tonnes. When the price falls to £0.90, the quantity demanded rises to 55,000 tonnes (point B)

If the price fell to £0.70, demand would rise to 75,000.

What explains the law of demand?

There are two factors that explain the inverse relationship between price and quantity demand.

1. Income effect . If prices rise, people will feel poorer after purchasing the more expensive goods. They will have less disposable income and so cannot afford to buy as much. If you have an income of £100, then an increase in the price of goods, your real income is effectively falling.

2. Substitution effect . If the price of one good rise, consumers will be encouraged to buy alternative goods which are now relatively cheaper than they were. For example, if the price of potatoes rises, it will encourage consumers to buy rice instead.

Demand Schedule

A demand schedule is a table showing the different quantities of a good that consumers are willing and able to buy at various prices for a particular period.

This is the market demand schedule for Netflix subscriptions

Demand Curve

A demand curve can be for an individual consumer or the whole market (market demand curve)

Exceptions to the law of demand

Giffen Good . This is good where a higher price causes an increase in demand (reversing the usual law of demand). The increase in demand is due to the income effect of the higher price outweighing the substitution effect. The idea is that if you are very poor and the price of your basic foodstuff (e.g. rice) increases, then you can’t afford the more expensive alternative food (meat) therefore, you end up buying more rice because it is the only thing you can afford. These goods are very rare and require a society with very low income and limited consumer choices.

Veblen good/ostentatious good . This is where if the price rises, then some people may want to buy more because the higher price makes the good appear more attractive. For example, if designer clothing becomes more expensive than for some individuals, the higher price makes it more expensive. However, whilst individual demand curves may be upward sloping. The market demand curve is unlikely to be. Because although it may be more desirable not everyone can afford it. In fact, the super-rich wants to buy more – precisely because it is exclusive.

Nobody buys the cheapest. Another possibility is that in restaurants, the most popular wine is the second cheapest. This is due to the behavioural choices of consumers. When going out to a restaurant, people don’t like to buy the cheapest wine because it suggests you don’t care about giving diners a good meal. Therefore, often the second cheapest wine often sells more because people think they are getting better quality. Therefore, if you increase the price of the cheapest wine, its demand may actually rise.

Perfectly inelastic . If demand is perfectly inelastic, then an increase in the price has no effect on reducing demand. This may be good like salt, which is very cheap but essential.

Perfectly elastic . Demand is infinite at a certain price, therefore reducing the price will not change the quantity demanded.

• Factors affecting demand
• Shift in Demand and Movement along the Demand Curve

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The Law of Demand (With Diagram)

In this article we will discuss about:- 1. Introduction to the Law of Demand 2. Assumptions of the Law of Demand 3. Exceptions.

Introduction to the Law of Demand :

The law of demand expresses a relationship between the quantity demanded and its price. It may be defined in Marshall’s words as “the amount demanded increases with a fall in price, and diminishes with a rise in price”. Thus it expresses an inverse relation between price and demand. The law refers to the direction in which quantity demanded changes with a change in price.

On the figure, it is represented by the slope of the demand curve which is normally negative throughout its length. The inverse price- demand relationship is based on other things remaining equal. This phrase points towards certain im­portant assumptions on which this law is based.

Assumptions of the Law of Demand:

These assumptions are:

ADVERTISEMENTS:

(i) There is no change in the tastes and preferences of the consumer;

(ii) The income of the consumer remains constant;

(iii) There is no change in customs;

(iv) The commodity to be used should not confer distinction on the consumer;

(v) There should not be any substitutes of the commodity;

(vi) There should not be any change in the prices of other products;

(vii) There should not be any possibility of change in the price of the product being used;

(viii) There should not be any change in the quality of the product; and

(ix) The habits of the consumers should remain unchanged. Given these conditions, the law of demand operates. If there is change even in one of these conditions, it will stop operating.

Given these assumptions, the law of demand is explained in terms of Table 3 and Figure 7.

Law of Demand

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• Q 1 / 10 Score 0 According to the Law of Demand, what happens to the quantity demanded of a good when its price increases? 29 It remains constant It increases It fluctuates It decreases

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• Q 1 According to the Law of Demand, what happens to the quantity demanded of a good when its price increases? It remains constant It increases It fluctuates It decreases 30 s
• Q 2 What is the main determinant of demand according to the Law of Demand? Preferences Supply Price Income 30 s
• Q 3 How is the Law of Demand typically represented on a graph? As an upward-sloping curve As a downward-sloping curve As a horizontal line As a vertical line 30 s
• Q 4 When the price of a product decreases, what effect does it have on the quantity demanded according to the Law of Demand? It decreases It fluctuates It remains constant It increases 30 s
• Q 5 In the context of the Law of Demand, what does a shift in the demand curve indicate? A change in consumer preferences A change in supply of the good A change in price of the good A change in quantity demanded at every price 30 s
• Q 6 What is the Law of Demand based on in terms of human behavior? The law of supply The idea of diminishing marginal utility The law of equilibrium Maximizing total utility 30 s
• Q 7 How does the Law of Demand explain the relationship between price and quantity demanded? It states that price and quantity demanded are always directly proportional. It states that price has no impact on quantity demanded. It states that quantity demanded remains constant regardless of price changes. It states that as the price of a good decreases, the quantity demanded increases, and vice versa. 30 s
• Q 8 How does the Law of Demand relate to the concept of consumer surplus? The Law of Demand leads to an increase in consumer surplus when prices decrease, and a decrease in consumer surplus when prices increase. Consumer surplus remains constant regardless of price changes. Consumer surplus decreases when prices decrease and increases when prices increase. The Law of Demand has no impact on consumer surplus. 30 s
• Q 9 What is the Law of Demand's explanation for why quantity demanded increases as the price of a good decreases? Due to the income and substitution effects Because of government regulations on pricing Because producers increase supply at lower prices Because consumers become more income-elastic 30 s
• Q 10 How does a change in consumer preferences impact the Law of Demand? A change in preferences only affects the price of the good. A change in consumer preferences can shift the demand curve, affecting the quantity demanded at every price level. Consumer preferences have no impact on the Law of Demand. The Law of Demand always supersedes changes in consumer preferences. 30 s

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