Law of Demand with Example-Explained Easily

Define Law of Demand

The law of demand defines that quantity purchased differs inversely with price. In simple words, the higher the price, the lower the quantity demanded.

The law of demand is one of the most major concepts in economics. It works with the law of supply to explain how market thrift share resources and decide the prices of goods and services that we notice in everyday transactions.

The law of demand results from the substitution effect and income effect.

Substitution Effect

Substitution effect refers to when the relative price or opportunity cost of goods and services increases, people search for substitutes. Hence, the quantity demanded of the goods and services decreases.

Income Effect

The income effect refers to when the price of goods and services increases concerning income; people cannot afford all the things they previously used to buy, so the quantity demanded of the goods and services decreases.

Demand Curve

A demand curve shows the relationship between the quantity demanded of goods and their price when all other influences on consumers’ planned purchases remain the same.

The following figure shows a demand curve for Soyabean oil.

Demand Curve

An increase in the price, other things remaining constant, decreases the quantity demanded and moved along the demand curve.

A demand curve is also a “Willingness and Ability” to pay curve. The smaller the quantity, the higher the price that someone is willing to pay for another unit. Willingness to pay measures marginal benefit.

Law of Demand with Example

The law of demand defines that when prices go up, demand for goods and services goes down, and when prices go down, demand for goods and services goes up. Imagine a General Store that sells Soyabean oil per Kg for $2. They sell 100Kg each day at that price. However, after prices go up by 4Kg, they only sell 50Kg each day.

Detailed Explanation of the Law of Demand and Example

Economics comprises the study of how individuals use the limited income to satisfy unlimited wants.

The law of demand emphasizes those unlimited wants. Logically, people select important wants and needs over less important ones in their economic behavior, which conveys how people choose among the limited incomes available to them.

For any economic good, the first unit of that good that a consumer acquires their hands on will be used to fulfill the supreme or important need the consumer has that that good can satisfy.

For example, consider a survivor on a Sahara desert who gets an eight-pack of bottled freshwater washed up onshore. The first bottle will use the first bottle to satisfy the survivor’s supreme and important felt need, most likely drinking water to avoid dying of thirst. The second bottle might use the second bottle for showering to stave off disease, an important but less immediate need.

The third bottle could use the third bottle for a less urgent need, such as boiling some fish to have a hot meal, and down to the last bottle, which the survivor uses for a relatively low priority like watering a small potted plant to keep him company on the island.

As you have read above, due to each additional bottle of water used for our survivor’s consecutively less highly valued want or need, we can say that the survivor values each additional bottle less than the one before. Similarly, when consumers buying goods on the market, each additional unit of any given good or service that they purchase will be put to a less valued use than the one before,

Hence, we can say that they value each additional unit less and less. Since they value each additional unit of the good less, they are enthusiastic about paying less for it. Therefore, the more items of a good consumers purchase, the less they are interested in paying the price.