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The law of demand is the principle of economics that states that demand falls when prices rise and demand increases when prices decrease. This can be stated more concisely as demand and price have an inverse relationship.Demand curves have many shapes but the law of demand suggests that they all slope downwards from left to right as above. The following are illustrative examples of the law of demand.
Prices Rise, Demand FallsA 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 RisesSolar 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 RiseDemand 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 FallA 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%.
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.
ExceptionsThe 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.|
| Type | | | Definition | The economic principle that with all else remaining constant, demand and price have an inverse relationship. | | Related Concepts | |
Economics
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