Law of Demand

Law of Demand

Law of Demand Jonathan Poland

The law of demand is a fundamental principle in economics that states that, all other factors being equal, the quantity of a good or service that consumers are willing and able to purchase decreases as the price increases. This relationship between price and quantity demanded is typically represented by a downward-sloping demand curve, which shows the quantity of a good or service that consumers are willing to purchase at different price points.

The law of demand is based on the concept of marginal utility, which refers to the additional satisfaction or benefit that a consumer derives from consuming an additional unit of a good or service. As consumers purchase more of a good or service, the marginal utility of each additional unit decreases, leading to a decrease in demand.

There are several factors that can affect the law of demand, including the income and wealth of consumers, the prices of related goods or services, and consumer tastes and preferences. For example, if a consumer’s income increases, they may be willing to purchase more of a good or service, leading to an increase in demand. Conversely, if the price of a related good or service increases, it may cause consumers to substitute away from the original good or service, leading to a decrease in demand.

The law of demand is an important concept in economics, as it helps to explain how prices and quantities of goods and services are determined in a market. It is also a key factor in the development of economic policy, as it can be used to understand how changes in prices or other economic conditions may affect consumer behavior and the overall economy. The following are illustrative examples of the law of demand.

Prices Rise, Demand Falls

A global shortage of pineapples causes prices to rise from $304 a ton to $404 a ton. Demand drops from 1 million pineapples a month to 600,000 pineapples a month as consumers can easily find substitute products such as other fruits.

Prices Fall, Demand Rises

Solar panel manufacturers regularly reduce the cost per watt for solar panels, sparking increased demand on a global basis. Between 1975 and 2018, price per watt dropped from around $64 to around $1 in many markets. This caused solar panel demand to surge from being a niche product to a common sight on rooftops in many nations.

Demand Rises, Prices Rise

Demand for real estate in a particular region increases due to foreign investors looking for a safe place to invest their wealth. This causes increased competition for each property on the market and prices rise.

Demand Falls, Prices Fall

A trendy technology company with a high stock valuation reports that grow is slowing while spending is surging. Demand for the stock instantly collapses and little demand materializes until the price has fallen more than 50%.

Sticky Prices

It is customary for bottled water in a particular nation to cost $1.50 or less. The nation increases its value added taxes and some sellers try to pass this cost to customers with a price of $1.60. Sellers who increase the price find that demand drops 70% as people are accustomed to the $1.50 price. With time, most sellers revert back to the old price.

Exceptions

The law of demand has many exceptions. For example, a speculative bubble in stocks might produce situations where price increases stimulate more demand due to a fear of missing out amongst investors.

Learn More…

Top-down vs Bottom-up Jonathan Poland

Top-down vs Bottom-up

Top-down and bottom-up are opposing approaches to thinking, analysis, design, decision-making, strategy,…

What is Cultural Fit? Jonathan Poland

What is Cultural Fit?

Culture fit refers to the compatibility of a candidate’s attitudes and experiences…

Design Strategy Jonathan Poland

Design Strategy

A design strategy is a high-level plan that guides the overall approach…

Design to Logistics Jonathan Poland

Design to Logistics

Design for logistics involves designing products with the entire supply chain in…

What is Genchi Genbutsu? Jonathan Poland

What is Genchi Genbutsu?

Genchi Genbutsu is a Japanese term that refers to the practice of…

Communication Strengths Jonathan Poland

Communication Strengths

Communication strengths are qualities or abilities that enable an individual to communicate…

Compliance Testing Jonathan Poland

Compliance Testing

Compliance testing is the process of evaluating an organization’s compliance with laws,…

Niche Market Examples Jonathan Poland

Niche Market Examples

A niche is a specific group of consumers who have distinct preferences…

Competitive Threats Jonathan Poland

Competitive Threats

A competitive threat is a potential source of competition that has not…

Jonathan Poland © 2023

Search the Database

Over 1,000 posts on topics ranging from strategy to operations, innovation to finance, technology to risk and much more…

Data Infrastructure Jonathan Poland

Data Infrastructure

Data infrastructure refers to the hardware, software, and network resources that support…

Information Security Risk Jonathan Poland

Information Security Risk

Information security risk refers to the potential for unauthorized access, disruption, modification,…

Knowledge Capital Jonathan Poland

Knowledge Capital

Knowledge capital refers to the resources and capabilities that enable a nation,…

Gap Analysis Jonathan Poland

Gap Analysis

A gap analysis is a method used to determine the distance between…

User Story Jonathan Poland

User Story

A user story is a concise description of a specific expectation or…

Ecotax Jonathan Poland

Ecotax

An ecotax is a tax levied on activities that have a negative…

Working Style Jonathan Poland

Working Style

Working style refers to an individual’s preferred approach to performing their job…

Public Capital Jonathan Poland

Public Capital

Public capital refers to the physical and intangible assets owned and managed…

Analytical Skills Jonathan Poland

Analytical Skills

Analytical skills are the abilities, knowledge, and experience related to the gathering,…