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# Definition of the law of demand

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block paragraph format!

This is by no means the perfect answer. It could certainly be better. But, I

wanted to give you a sense of what I am looking for in an answer.

Question:

Please thoroughly and completely explain the law of demand.

 Definition of the law of demand o Demand is a schedule or curve that shows the various amounts of a

product that consumers are willing and able to purchase at each of a series

of possible prices during a specified period of time.

 The law of demand tells us that there is an inverse relationship between price and quantity demanded. This is supported by the following three concepts:

 Diminishing marginal utility which means consumption of successive units of a particular product will yield less and less marginal utility.

o Marginal utility – the change in utility that results from a one-unit change in the consumption of a good or service.

o The income effect – which means that a lower price increases the purchasing power of the buyers money income allowing the buyer to

purchase more of the product than before.

o The substitution effect – which means that at a lower price buyers are motivated to substitute what is now a less expensive product for similar

products that are now relatively more expensive.

 The law of demand is graphically represented as a downward sloping curve.

 An increase in demand is expressed graphically as a shift of the demand curve to the right while a decrease in demand is expressed as a shift of the demand curve

to the left.

 An increase or decrease in quantity demanded is represented as a movement alone a given demand curve and is caused by an increase or decrease of the price of the

product.

 A demand curve will shift as a result of a change in one of the determinants of demand which are:

 Buyer tastes – a change in tastes can cause buyers to demand more, or less of a product

 Number of buyers – an increase in the number of buyers will result in an increase in the demand for a product

 Income – a. If income increases and the demand for a good increases, that good is

called a normal good.

b. If income increases and the demand for a good decreases, that good is called an inferior good

 Expectations – expectations of buyers will impact demand. If the buyer expects the price of the product to increase, this would likely cause a decrease

in demand for the product.

 Prices of related goods – a. If the price of a good increases, we would expect the demand for the

substitute good to increase.

b. If the price of a good increases, we would expect the demand for its complement to decrease.

 Price of non-related goods – a price change for one good would have no impact on the demand for the other good.