What is the Law of Demand?

The law of demand is a microeconomic principle. According to this principle, a rise in the price of a good or service will cause the number of people demanding that good or service to contract. Conversely, a decrease in the price of a good or service will cause the demand for the good or service to expand. In order for the law of demand to be properly applied and understood, external factors such as the consumer’s income, personal preference and the price or availability of a substitute good are controlled for and not considered in the analysis. Essentially, the law of demand provides insight into the impact of price fluctuations on consumer behavior — at lower prices, products or services are more attractive to consumers because they have more disposable income left over after purchasing them, whereas at higher prices, consumers might forgo such purchases because they will have less money afterward.

Consumer purchasing patterns substantiate the law of demand. For example, when there is a bountiful harvest of fruits such as apples and oranges, shoppers buy more because the high availability of these fruits means that the price is cheaper. When crops are ravaged by natural elements such as frost, hurricanes or floods, the price of these goods is higher because there are fewer of them available in grocery stores, and consumers respond to this increase in price by abstaining from purchasing these fruits or by buying other fruits that are in season. This same idea can also be applied to larger purchases such, as homes. Often, when a house has been on the open market for a prolonged period of time, the law of demand dictates that the seller should decrease the price in order to attract more potential buyers.

Several reasons exist for the negative relationship between demand and price delineated by the law of demand. First, when the price of a product or service increases, the opportunity cost of purchasing that product or service also increases. Most consumers are unwilling to buy something that will render them unable to purchase other items they need or place a higher priority on purchasing.

Also, marginalism influences consumer spending. Marginalism, particularly the concept of diminishing marginal utility, expresses the theory that over time, consumers will derive less satisfaction from each additional purchase of a particular good or service and will eventually make their decision to buy contingent only on price. Finally, as long as related goods can be purchased for less money, consumers will abandon higher-priced products or services.