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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
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.