Law Of Demand

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law of demand

Definition: The law of demand states that other factors being constant (cetris peribus), price and quantity demand of any good and service are inversely related to each other. When the price of a product increases, the demand for the same product will fall.

The law of demand states that all other things being equal, the quantity bought of a good or service is a function of price. As long as nothing else changes, people will buy less of something when its price rises. They’ll buy more when its price falls. 

The demand schedule tells you the exact quantity that will be purchased at any given price. A real-life example of how this works in the demand schedule for beef in 2014.

The demand curve plots those numbers on a chart. The quantity is on the horizontal or x-axis, and the price is on the vertical or y-axis. 

If the amount bought changes a lot when the price does, then it’s called elastic demand. An example of this is ice cream. You can easily get a different dessert if the price rises too high. 

If the quantity doesn’t change much when the price does, that’s called inelastic demand. An example of this is gasoline. You need to buy enough to get to work regardless of the price. 

This relationship holds true as long as “all other things remain equal.” That part is so important that economists use a Latin term to describe it — ceteris paribus. The “all other things” that need to be equal under ceteris paribus are the other determinants of demand. These are prices of related goods or services, income, tastes or preferences, and expectations. For aggregate demand, the number of buyers in the market is also a determinant. 

If the other determinants change, then consumers will buy more or less of the product even though the price remains the same. That’s called a shift in the demand curve.

law of demand

Law of Demand Explained

For example, airlines want to lower costs when oil prices rise to remain profitable. They also don’t want to cut flights. Instead, they buy more fuel-efficient planes, fill all seats, and change operations to improve efficiency. As a result, they’ve raised seat-miles per gallon from 55 in 2005 to 60 in 2011. The law of demand would describe this as the quantity of fuel required by the airlines dropped as the price rose. 

Of course, all other things were not equal during this period. In fact, demand for jet fuel was further lessened because airlines’ income also dropped at the same time. The 2008 global financial crisis meant that travelers cut back on their demand for air travel. The airlines’ expectations about the price of jet fuel also changed. They realized it would probably continue to rise over the long term. The other two determinants of airline’s demand for jet fuel stayed the same. They couldn’t switch to another fuel, and their tastes or desire to use jet fuel didn’t change.


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