Wednesday, January 28, 2015

Law of Demand: What is it?

Many viewers of political commentators will see the "experts" comment on prices of good or services falling or rising due to declined or increased demand. What does that mean? How does this impact prices? 

Basic Macro-Economic Theory states that the the price and the demand of that stated good has an inverse relationship: As the price of a good rises, the quantity demanded of that said good declines. Conversely, as the price lowers, the quantity demanded for that good rises. An example of this can be seen when a store has a popular good, that is on sale for 50% off. The store will see an increase in traffic, as more consumers will line up to purchase that good at a lower price. Conversely, if the store decided to raise the price 50% above the current price, consumers will not seek to purchase this item. 

This Law can be displayed graphically, as the graph will demonstrate a downward sloping line, going from left to right. It is negatively sloped, showing the inverse relationship between price and quantity demanded. 

Of course, this analysis is very simplistic, as there are much more deeper concerns with this particular law. One concern: Why is the function, or the line, negatively sloped? Why does it go downward from left to right? These concerns are addressed in the notion of Marginal Utility, as that will be discussed in a different blog post. 

No comments: