Law of demand

It is very important to apprehend the difference between demand and the quantity demanded as they are completely different. Demand refers to the demand curve (demand schedule), while quantity demanded refers to a specific point located on the demand curve which corresponds to a handy high fic price. Therefore, a change in quantity demanded reflects a change in the price.

Consider the function ${\displaystyle \ Q_{x}=f(P_{x};\mathbf {Y} )}$, where ${\displaystyle Q_{x}}$ is the quantity demanded of good ${\displaystyle x}$, ${\displaystyle f}$ is the demand function, ${\displaystyle P_{x}}$ is the price of the good and ${\displaystyle \mathbf {Y} }$ is the list of parameters other than the price.

The law of demand states that ${\displaystyle {\frac {\partial f}{\partial P_{x}}}<0}$. Here ${\displaystyle \partial /\partial P_{x}}$ is the partial derivative operator.[1]

The above equation, when plotted with quantity demanded (${\displaystyle Q_{x}}$) on the ${\displaystyle x}$-axis and price (${\displaystyle P_{x}}$) on the ${\displaystyle y}$-axis, gives the demand curve, which is also known as the demand schedule. The downward sloping nature of a typical demand curve illustrates the inverse relationship between quantity demanded and price. Therefore, a downward sloping demand curve embeds the law of demand.

An increase in demand is depicted by a rightward shift in the demand curve, from DD0 to DD1. At first, a consumer is willing to consume Q0 units of goods at the price P0, shown by Point A. After their demand for the good increases, for the same quantity demanded Q0, they are now willing to pay at price P1, shown by Point B. For the original price P0, they are now willing consume Q1 units, shown by Point C.

Note that "demand" and "quantity demanded" are used to mean different things in economic jargon. On the one hand, "demand" refers to the entire demand curve, which is the relationship between quantity demanded and price. Changes in demand are due to changes in other determinants (${\displaystyle \mathbf {Y} }$), such as the income of consumers. Therefore, "change in demand" is used to mean that the relationship between quantity demanded and price has changed. Alfred Marshall worded this as:

When then we say that a person's demand for anything increases, we mean that he will buy more of it than he would before at the same price, and that he will buy as much of it as before at a higher price.[4]

Changes in demand are depicted graphically by a shift in the demand curve. [1] On the other hand, "quantity demanded" refers to the quantity of goods consumers want for a given price, conditional on the other determinants. "Changes in quantity demanded" is depicted graphically by a movement along the demand curve.

The law of demand was documented as early as 1892 by economist Alfred Marshall.[4] Due to the law's general agreement with observation, economists have come to accept the validity of the law under most situations. Furthermore, researchers found that the success of the law of demand extends to animals such as rats, under laboratory settings.[5][6]

Generally the amount demanded of a good increases with a decrease in price of the good and vice versa. In some cases, however, this may not be true. There are certain goods which do not follow this law. These include Veblen goods, Giffen goods, stock exchanges and expectations of future price changes. Further exception and details are given in the sections below.

Initially proposed by Sir Robert Giffen, economists disagree on the existence of Giffen goods in the market. A Giffen good describes an inferior good that as the price increases, demand for the product increases. As an example, during the Great Famine of Ireland of the 19th century, potatoes were considered a Giffen good. Potatoes were the largest staple in the Irish diet, so as the price rose it had a large impact on income. People responded by cutting out on luxury goods such as meat and vegetables, and instead bought more potatoes. Therefore, as the price of potatoes increased, so did the quantity demanded.[7]

• Revealed preference
• Aggregation problem
• Representative agent
• Methodological individualism
• Demand (economics)
• Second law of demand (price elasticity over time)
• Third Law of Demand Alchian–Allen effect
• Supply and demand
• Law of supply