Law of demand

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Statement

The law of demand states the following equivalent things:

  • The price-elasticity of demand for a good is negative, or at best, non-positive.
  • ceteris paribus, as the price of a good increases, the demand for it decreases (or at best, remains the same).
  • ceteris paribus, as the price of a good decreases, the demand for it increases (or at best, remains the same).

Goods satisfying the law of demand are termed ordinary goods. Examples of goods that (appear to) fail the law of demand are Veblen goods and Giffen goods.

Levels of operation of the law

The law of demand operates at multiple levels.

  • For a given household and a given commodity: The demand of a particular household for a particular commodity is expected to increase, or at least stay constant, as the price of the commodity falls. This relies on the crucial assumption that the marginal benefit from every additional unit of the commodity is decreasing. Further information: Law of demand for individual buyers follows from diminishing marginal benefit
  • For an aggregate of households and a given commodity: The demand over an aggregate of households for a particular commodity is expected to increase, or at least stay constant, as the price of the commodity falls. This may happen because the consumption of individual households increases steadily, as well as because the number of households purchasing the commodity also increases steadily, as the price falls to the reservation price. The second effect is due to differences in reservation prices across households. Note that this effect is operational even when there is essentially no scope for a single individual or household to buy more than one unit of the commodity. Further information: Law of demand for multiple buyers following from differences in reservation prices