Lesson preview · Demand
The Law of Demand
~7 min · Free to read
Sarah’s campus coffee shop dropped latte prices from 5 dollars to 3.50 dollars. Daily sales jumped from 400 cups to 720. Her puzzled friend asked, ‘Don’t they make less per cup?’ Yes — but they sell far more cups. They also just illustrated one of the most reliable patterns in economics: when prices fall, people buy more; when prices rise, people buy less. Economists call it the Law of Demand.
Key Term
Law of Demand
All else equal, as the price of a good rises, the quantity demanded falls. As the price falls, the quantity demanded rises. Price and quantity demanded move in opposite directions — an inverse relationship.
Key Term
Quantity Demanded
The specific amount of a good buyers are willing and able to purchase at a particular price. Not ‘how much they want’ in general — but how much they’d actually buy at that exact price.
Linear demand. Price up, quantity down (b > 0). The curve slopes down.
Why does it slope down? Two distinct mechanisms push every buyer in the same direction whenever a price changes:
Key Term
Substitution Effect
When a good’s price rises, buyers switch to cheaper alternatives (substitutes). Chicken gets pricey → people buy more beef or tofu. Higher price → substitute away → quantity demanded falls.
Key Term
Income Effect
When a good’s price rises, your money doesn’t stretch as far — your real purchasing power drops, even if your paycheck didn’t change. You feel a bit poorer, so you buy less.
Concrete example. Gas jumps from 3 dollars to 6 dollars/gallon. Substitution effect: you carpool, bike to closer places, buy a hybrid — switching away from gas. Income effect: filling up costs twice as much, effectively shrinking your budget — so you drive less and spend less elsewhere. Both forces fire at once and both cut quantity demanded.
Tip
Ceteris paribus — the small print
The law holds all else equal (Latin: ceteris paribus). It predicts what happens when only price changes. Real-world data often shows prices rising while sales also rise — that’s because incomes, tastes, and substitutes were all moving too. The law isn’t broken; the controlled-experiment assumption just didn’t hold.
Trap · Common Misconception
'Demand slopes down because people are cheap'
That’s the what, not the why. The actual mechanism is the substitution effect (switching to alternatives) plus the income effect (real purchasing power falls). ‘Being cheap’ isn’t an economic explanation.
Check yourself · no marks
Gas prices rise from 3.50 dollars to 4.75 dollars per gallon. According to the law of demand, what happens to the quantity people buy?
Commit to one first. Guessing and being wrong beats reading the answer cold.
Worked Example
Concert ticket prices for a mid-size artist are tested at four price points. At 100 dollars each, 200 tickets sell. At 75 dollars, 350 sell. At 50 dollars, 600 sell. At 25 dollars, 950 sell. Does this data follow the law of demand? Identify which mechanisms (substitution, income) likely explain the pattern.
Practice · 1 / 5
Apple raises iPhone prices, all else equal. According to the law of demand, quantity demanded:
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