Chapter 3, Problem 3.1LO

To determine

The Law of Demand.

Explanation of Solution

- The law of demand is a fundamental economic principle. It states that as the price of a good increases, its quantity demanded decreases and vice versa. In other words, there is an inverse relationship between the quantity demanded and product price. The law is based on the assumption of ceteris paribus, that is, when all other factors affecting the demand remain constant. The other factors like consumer income, consumer tastes and preferences, prices of compliments and substitutes etc are exogenous factors which are assumed to be constant.

The figure below shows a downward sloping demand curve from left to right based on the law of demand. When the price of the good is $30, the quantity demanded is 50 thousand units and when the price increases to $60, the quantity demanded falls to 20 thousand units and so on.

Algebraically the law of demand can be stated in partial derivatives (assuming ceterus Paribus) as follows −

Where X = Quantity demanded.

P = Price.

Economics Concept Introduction

Introduction:

Law of Demand − The demand law states that as the price of a good increases its quantity demanded decreases and vice versa. In other words, there is an inverse relationship between the quantity demanded and product price. The law is based on the assumption of ceteris paribus, that is, when all other factors affecting the supply remain constant.