Law of demand
The Law of Demand is a fundamental principle in economics that describes the inverse relationship between the price of a product or service and the quantity demanded by consumers. Specifically, as prices rise, demand typically decreases, while lower prices tend to increase demand. This principle underscores the role of consumers, who make purchasing decisions based on price fluctuations. The concept also highlights how supply interacts with demand; for instance, when supply increases and prices fall, consumers are more inclined to purchase the product.
In practical scenarios, such as the launch of a new smartphone, initial high demand allows manufacturers to set higher prices. However, as the product becomes more widely available and demand stabilizes, prices may decrease. This dynamic continues until the market reaches a state of equilibrium, where supply and demand balance out. While the Law of Demand is a key economic concept, it is essential to recognize that other factors—such as consumer preferences, economic conditions, and availability of alternatives—also influence purchasing behavior and overall demand. Understanding these nuances can provide deeper insights into market dynamics.
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Law of demand
The law of demand is a basic tenet of economics. It states that as the price of a product or service rises, demand for it falls. The reverse is also true—if the price of an item falls, demand usually rises. Demand is controlled by consumers, who decide what to buy with their money. A change in price is the only factor that will change the quantity of items demanded.
Overview
Because consumers create a demand for goods, higher prices usually result in a lower demand. When the supply of a product increases, the price decreases, and consumers are more likely to buy. Therefore, lower prices increase demand. If demand for an item outstrips supply, creating a shortage, the price increases. At some point, demand and supply may reach equilibrium, which means they are balanced or nearly balanced.
Producers of goods and services control the quantity of what they sell based on two factors: demand and profit. Prices are based on these factors. Often, when a new product is introduced, demand is high and quantities are limited, which allows the manufacturer to charge a high price and make a significant profit. For example, when an upgrade of a smart phone becomes available, many consumers are eager to have it and will pay whatever price the manufacturer asks. Stores may quickly sell out of their supply of phones, so consumers must wait to buy one. The manufacturer may increase the quantity of the item to meet demand. After a few months, demand drops because most of the people who were willing to buy the phone at full price have done so. When demand drops, the price and the profit also decrease. Now a new group of consumers will buy the phone. Once this demand is met, the manufacturer may cut production to maintain the price or drop the price again. This process continues until the market for the new phone reaches equilibrium in which supply and demand are balanced and the manufacturer is still able to make a profit.
Of course, this is the theoretical model. In the real market, other factors influence consumers' choices and therefore demand. People looking for a smart phone have many options among manufacturers, models, and prices. But whether they are shopping for a phone, a vacation, or an ice-cream cone, consumers' choices drive demand. In addition, the general state of the economy affects whether consumers are earning enough and feeling confident enough to spend their money on gadgets, hotels, or treats. So even though the general rule is called the law of demand, other factors come into play and determine whether this law applies.
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Bibliography
Arnold, Roger A. "Supply and Demand: Theory." Macroeconomics. Mason, Oh: Cengage, 2011. Print.
Ball, Madeline K. and David Seidman. Supply and Demand. New York: Rosen, 2012. Print.
"The Law of Supply and Demand." What Is Economics? What Is Economics. Web. 9 Jul. 2014.
<http://www.whatiseconomics.org/>
Pinkasovitch, Arthur. "Introduction to Supply and Demand." Investopedia.com. Jan. 30, 2014. Web. 9 Jul. 2014.
<http://www.investopedia.com/articles/economics/11/intro-supply-demand.asp>