What is the Law of Demand?

The Law of Demand is an economic principle that explains the inverse relationship between the price of a product or service and its quantity demanded. In other words, when the price of a good or service increases, the quantity demanded decreases, and vice versa, all other factors remaining constant.

There are several reasons why the Law of Demand exists: 1. Substitution effect: When the price of a good increases, consumers will look for cheaper substitutes to maintain their consumption levels without incurring additional expenses. 2. Income effect: As the price of a good increases, the purchasing power of the consumers decreases, and they can afford less of it. 3. Diminishing marginal utility: As a consumer consumes more units of a good, the additional satisfaction obtained from each subsequent unit decreases. As a result, the quantity demanded decreases as the price increases.

Suppose there is a coffee shop selling coffee at \(2 per cup, and it sells 50 cups per day. If the coffee shop increases the price to \)4, it is reasonable to assume that the total number of cups sold per day will decrease for two reasons: 1. Some customers may look for cheaper alternatives, such as buying coffee from a competing coffee shop or brewing coffee at home. 2. As the income effect plays a role, some customers may find the higher-priced coffee to be unaffordable and reduce their coffee consumption. Conversely, if the coffee shop lowers the price from \(2 to \)1 per cup, it is likely that the quantity demanded will increase. The lower price may attract new customers, and existing customers may consume more coffee due to the decreased cost. This practical example demonstrates the inverse relationship between price and quantity demanded, as described by the Law of Demand.