The Law of Demand: Definition, Curve, Factors & Explanation by Economists

Bittime - The law of demand is one of the most basic and important concepts in microeconomics. 

It explains how consumers respond to price changes of goods or services by adjusting the quantity demanded. 

This article will discuss in detail the definition, function, statement, curve, influencing factors, examples, and expert reviews so your understanding becomes comprehensive.

What Is the Law of Demand?

Simply put, the law of demand states that when the price of a good rises, the quantity demanded will fall, and conversely, when the price falls, demand increases — assuming other factors remain constant (ceteris paribus).

According to OCBC NISP, the law of demand is the rule that explains that the quantity purchased is inversely related to the price level.

Several sources also express this as the principle that lower prices cause demand to rise and higher prices cause demand to fall.

Some economists define demand as consumers’ willingness to buy a good at various price levels over a period of time, where the ability to pay (purchasing power) is also a requirement.

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Statement, Function & Formula of the Law of Demand

Statement of the Law of Demand

“The higher the price of a good, the smaller the quantity demanded; conversely, the lower the price, the more the good is demanded.”

Demand Function & Formula

The demand function describes the mathematical relationship between price (P) and the quantity demanded (Q). The common formula is:

• Q = a – bP
   
• Or in another form: P = a – bQ
  Where a = constant, and b = slope of the demand curve.

This function helps project how demand will change when price changes.

Demand Curve Illustration

The demand curve graphically shows the negative relationship between price and quantity demanded — the line slopes downward from the top left to the bottom right.

The graphic illustrates that at price P1 the quantity demanded is Q1; when price falls to P2, demand increases to Q2. 

Such graphs are used in international economic literature to illustrate the law of demand.

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Factors Affecting Demand

Besides price, many other factors can shift the demand curve or change the quantity demanded:

• Consumer Income: When income rises, demand for normal goods increases, and vice versa.
  
   
• Prices of Related Goods: Substitute and complementary goods affect demand. If the price of a substitute falls, demand for the main good may decline.
  
   
• Tastes / Preferences: Changes in consumer preferences can shift demand up or down.
  
   
• Expectations of Future Prices: If consumers expect prices to rise, they tend to buy now, increasing current demand.
  
   
• Number of Consumers / Market Size: Population growth or new consumers entering the market will raise total demand.
  
   
• Social & Demographic Factors: Age, lifestyle, and culture can affect purchasing desires.

Changes in these factors cause the demand curve to shift right (demand increases) or left (demand decreases). 

Don’t confuse a price change (movement along the curve) with a change in demand (shift of the curve).

Explanations from Economists

Various classical and modern theories and economists explain the law of demand using different approaches:

• Marshall introduced the concept of marginal utility — as more units are consumed, the additional benefit per unit decreases, so consumers are reluctant to buy large quantities at high prices.
  
   
• In modern economic literature (such as Standard Microeconomics), the law of demand is assumed with caveats that marginal utility falls, income is constant, preferences are fixed, and prices of other goods remain unchanged.
  
   
• Price Elasticity of Demand in many theories explains how responsive quantity demanded is to price changes — goods with high elasticity are very price-sensitive.
  
   
• Some exceptions (like Veblen or Giffen goods) are special cases where the law of demand may not “hold” according to traditional theory.

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Examples & Applications of the Law of Demand

• Simple example: If the price of apples rises from IDR 10,000 to IDR 15,000, consumers may buy fewer apples or switch to other fruits.
  
   
• In transportation, an increase in ride-hailing fares can reduce usage and push people to public transport.
  
   
• Companies can use this theory to set an optimal price to maximize revenue — pricing too high may kill demand.

Conclusion

The law of demand is a fundamental concept in microeconomics that shows the negative relationship between price and the quantity demanded (ceteris paribus). 

The demand curve, demand function, and influencing factors are essential to understand consumer behavior and market shifts. 

Combined with views from classical and modern economic theories, the law of demand helps economic actors — consumers, firms, and policymakers — make rational decisions.

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FAQ

What is the difference between demand and quantity demanded?

Demand refers to the entire curve that depicts the relationship between price and quantity, whereas quantity demanded is a specific point on the curve showing the amount demanded at a particular price.

Does price always up → demand down?

In basic theory, yes, but there are exceptions such as Veblen goods (status goods) or Giffen goods which can violate this pattern in certain cases.

How do firms use the law of demand?

Firms can set optimal prices based on demand elasticity: if a product is elastic, a price cut can trigger a large enough increase in demand to raise total revenue.