The law of demand was first proposed by the economist Alfred Marshall. The law of demand and the law of supply form the basis of the market economy. The law of supply helps producers decide how much of a good they can produce and sell, while the law of demand determines how much consumers will buy. The law of demand also helps to predict consumer behavior. The law of demand can also be used to predict specific economic events. For instance, a fall in housing demand could be a sign of inflation.
In terms of the balance of supply and demand, important drivers of demand include product price and customer preferences. The law of demand supports the idea that price increases will reduce customer demand. However, in the case of price decreases, customers may naturally prefer to buy more products.
When analyzing the law of demand, a demand schedule is used to represent the willingness of customers to buy a given quantity at different prices.
There are two types of demand schedules. These are:
- Individual demand schedule
- Market demand schedule
What Is Individual Demand Shedule?
An individual demand schedule is a schedule that shows the extent to which a consumer is willing to buy a particular good or service at different price levels. The individual demand schedule is based on several factors that determine the amount of demand at different price levels. These factors include consumer preferences, income, price, and the amount of alternative demand for similar products.
What Is Market Demand Schedule?
A market demand schedule is a schedule showing how much all consumers in a market are willing to buy for a given good or service at different price levels. The market demand schedule is the sum of all individual demand schedules (schedules showing the quantities demanded by different consumers at different prices).
What Are the Factors Affecting Demand?
Demand can be influenced by various factors. Rising incomes cause people to be willing to spend more. This tends to increase the demand for assets. The availability of the closest substitute products that compete with a given economic product tends to reduce the demand for that product. This is because they can satisfy the same type of consumer wants and needs. Conversely, the availability of close and complementary products tends to increase the demand for an economic good, as the combined use of the two goods may be more valuable than their separate use. As an example, consider a pair such as peanut butter and jam.
Future expectations, changes in background environmental conditions, changes in the actual or perceived quality of a product or asset change the pattern of consumer preferences and how the good can be used and how urgently it is needed, and so the demand curve may also undergo a shift.
What Is Law of Supply?
Supply refers to the total quantity of a product or service offered to consumers at a given price point. Fluctuations in the supply of a product cause fluctuations in demand, which directly affects its price.
The law of supply can be defined as a microeconomic law that states that, all other factors being equal, as the price of a product or service increases, the quantity demanded by consumers will increase or decrease.
Why Is Law of Demand Important?
The law of supply and the law of demand are factors in determining the prices of products, assets, and securities. These laws help identify opportunities to buy low- or high-priced products, assets, or securities. For instance, a firm may increase production in response to rising prices, stimulated by increased demand.
