Why did you choose that car, that house, or that pair of shoes?
You might say it’s because you wanted it, so you bought it. Economists call that the Law of Demand, which shows that people want a certain product, so they buy it.
You might not be aware of this law, but it influences your spending every day.
To learn more about the basics of demand, read on.
What is the Law of Demand
In its most basic form, the Law of Demand states that as prices increase, demand for a good or service decreases, and vice versa. The Law of Demand is one of the most important principles in economics and has a wide range of real-world applications.
This law governs how businesses compete and how consumers buy products. What many businesses and consumers don’t know is there are many demand basics examples of how the Law of Demand operates.
Examples of the Law of Demand
Sales on Black Friday are the perfect example of the Law of Demand in action. The Law of Demand states that all other things being equal, the quantity demanded of a good or service rises as the price falls.
In other words, people are more likely to buy something when it’s on sale. The same principle applies to Black Friday sales. Retailers offer deep discounts on popular items, and consumers flock to stores to take advantage of the deals.
As with new products, the release of the new iPhone increased demand for the product. The Law of Demand basics stipulates that as the price of good decreases, the demand for the good increases.
The new iPhone is a prime example of this concept, as people were willing to pay a higher price for the product when it was first released. However, as time went on and the price of the new iPhone decreased, the consumer demand for the product increased.
Exceptions to the Law of Demand
One exception to the Law of Demand is the Giffen good, named after English economist Robert Giffen.
A Giffen good is a good for which demand decreases as prices increase. This happens when the good is seen as a necessity, and people will continue to purchase it even if the price increases.
Another exception is called Veblen goods, which are luxury items that see an increase in demand as prices increase. This is due to purchasing a luxury item’s perceived status and prestige.
If you need more insights about Veblen goods, you can access them on this page.
Companies Use Law of Demand to Set Prices
Companies use the Law of Demand in setting prices for their products and services. There are a few exceptions to the Law of Demand, but they are not common.
The most important exception is when a good or service is inelastic, which means that consumers will continue to purchase the same quantity even if the price increases.
Demystifying the Law of Demand
To understand the Law of Demand, it is important to know the basic concepts and examples. The Law of Demand states an inverse relationship between price and quantity demanded.
This means that as prices increase, the quantity demanded decreases. This law has a few exceptions, but understanding the basics is a good start.
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