Law of Demand (Topic 1)

Law of Demand

  • States that as price increases, the quantity demanded decreases, ceteris paribus (all things are held equal), vice versa

Two Important reasons to remember why quantity demanded tends to fall as price increases


  1. Substitution effect

  • The tendency of consumers to replace a more expensive good with a cheaper alternative when its price rises

  • The price of item A increases, so consumers buy more of item B, which is cheaper than item A

  1. Income effect

  • The change in consumption resulting from a change in real income

  • The demand for normal substitutes increases as income increases

  • The demand for inferior substitutes decreases as income increases

  • “Go together”

  • Classified into two goods: inferior good and normal good

    • Inferior good

      • Income increases while the quantity demanded decreases

      • For example, if the price of the fried chicken in the canteen increases, the demand for it will decrease because consumers will opt to buy cheaper substitutes. In this scenario, the fried chicken becomes the inferior good

    • Normal good

      • Income increases while the quantity demanded increases as well

      • May also be called “Giffen goods” which are non-luxury items whose consumption increases as price increases, such as rice, bread, wheat, etc.

      • Most of these goods are mostly purchased for the status symbol of the consumer

      • For example, a person with a higher salary upgrading from off-brand shoes to name-brand sneakers like Nike or Adidas



Non-price factors/determinants that can influence the market:


  1. Tastes and preferences

  2. Population

    1. If the population is larger, there will be an increase in the quantity demanded

  3. Prices of related goods (substitute, complementary)

    1. If the price of a substitute good increases, the quantity demanded for the original good increases

      1. Ex: If the price of tea rises, the quantity demanded for coffee increases

    2. If the price of a complementary good (products that go together such as a car and gasoline) increases, the quantity demanded for the original good decreases

      1. Ex: If the price of printers rises, demand for printer ink decreases

  4. Expectations

  5. Income


Change in quantity demanded

  • Refers to a change in the quantity purchased in response to an increase or decrease in the price of a product under consideration

  • This can be described as movement along our demand curve from one point to another point on the curve

  • The cause of such a change is an increase or decrease in the price of the product under consideration. In such a case, it is incorrect to say that the demand increases or decreases

  • It is more appropriate to say there was an increase or a decrease in the quantity demanded



Demand Curve

  • The demand curve displays that as price increases, quantity demanded decreases, and vice versa

    • In the graph shown above, we can see that from point A to B, the quantity demanded per week of the considered good has gone up from 400 to 800 units as the price of the good went down from P60 to P80. We can also say that from point B to A, the quantity demanded of the considered good has gone down from 800 to 400 as the price went up from P40 to P60


Changes in demand

  • Changes caused by non-price factors affecting market demand

  • An increase in demand will shift the demand curve to the right

  • A decrease in demand will shift the demand curve to the left

Demand Function

  • A mathematical expression that shows the relationship between the quantity of a good or service a consumer is willing to buy and the price and non-price factors that influence this demand

  • Price is the primary factor for demand, but non-price factors could also affect it


Qd = f(P,Y,Prg,Ps)


Qd = Quantity Demanded

P    = Price of Goods & Services 

Y    = Income of the Consumers

Prg   = Price of the Related Goods

Ps  = Population



Example: 


A 3in1 coffee product is mass-produced in the market, having its price (P), creamer (Pc), and sugar (Ps) prices affecting its demand. Its demand function could be assumed as:


Qd = 80 - 5P - 2Pc -3Ps


This linear equation shows that the demand:

  • Decreases by 5 units for every increase in its price

  • Decreases by 2 units for every increase in creamer price

  • Decreases by 3 units for every increase in sugar price


If the price of the creamer was P5 and the price of the sugar was P6, what is the new demand function?


→ 80 - 5P - 2(5) - 3(6)

→ 80 - 5P - 10 - 18

→ 52 - 5P : this will be the new demand function


What is the quantity demanded if the price of the 3in1 coffee is P25?

→ 52 - 5(5)

→ 52 - 25

→ 27 : The quantity demanded is 27