What is the Law Demand ? – Factors affecting demand and Price System
Economics is the study of how individuals make use of few resources to satiate endless demands. These limitless needs are the focus of the law of demand. In their economic behavior, individuals naturally prioritize more urgent demands and requirements above less urgent ones.
This habit also extends to how people pick among the limited means at their disposal. For any economic good, a customer will often utilize the first unit they can get their hands on to take care of the most pressing need they have that the good can meet.
The Law of demand explains consumer choice behavior when the price changes. In the market, assuming other factors affecting the demand are constant, when the price of good rises, it leads to a fall in the demand for that good. This is the natural consumer choice behavior. This happens because a consumer hesitates to spend more for the good for the fear of going out of cash.
What is the Law of Demand?
The law of demand states that other factors being constant (Cetris Peribus), price and quantity demand of any good and service are inversely related to each other. When the price of a product increases, the demand for the same product will fall.
The law of demand states that the quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded. This occurs because of diminishing marginal utility. That is, consumers use the first units of an economic good they purchase to serve their most urgent needs first, then they use each additional unit of the good to serve successively lower-valued ends.
Demand vs. Quantity Demanded
Understanding the distinction between the phenomena of demand and the quantity demanded is crucial in economic thought. Demand in the graph is represented by the light blue line passing through points A, B, and C. It conveys the connection between the quantity of the available economic good and the urgency of consumer needs. A movement in demand causes this curve’s position or form to change, reflecting a shift in the underlying pattern of consumer requirements and wants relative to the resources available to meet them.
On the other hand, the term “quantity demanded” refers to a point along the horizontal axis. Changes in the quantity demanded strictly reflect changes in the price, without implying any change in the pattern of consumer preferences. Changes in quantity demanded just mean movement along the demand curve itself because of a change in price. These two ideas are often conflated, but this is a common error—rising (or falling) prices do not decrease (or increase) demand; they change the quantity demanded.
Factors affecting demand
So what does change demand? Numerous variables can affect the demand curve’s shape and location.
- Price of the commodity
- The prices of other commodities
- Change in real or disposable income of the consumer
- Taste and fashion.
- Government policy.
- An expectation of future changes in prices.
- Weather conditions and the season.
- The size of the population and the age distribution of the population.
- Taxation on commodities.
This refers to the mechanism by which prices of goods and services are determined by the forces of demand and Supply.
The price system is a means of organizing economic activity. It does this primarily by coordinating the decisions of consumers, producers, and owners of productive resources. Millions of economic agents who have no direct communication with each other are led by the price system to supply each other’s wants.
All modern societies use price systems. They motivate both consumers and producers to make decisions. For example, in most cases, a consumer will choose the product that is the least expensive, and producers choose to produce only products that will make a profit. The system informs both of these decisions without the producer and consumer having to communicate directly.
The function of the Price System
It determines the allocation of scarce resources: if resources become scarce, their prices will be high. Therefore only those who essentially need them will afford to buy them.
It influences production patterns: through prices that consumers are willing to pay, suppliers are able to identify commodities that are in high demand and are able to adjust their production patterns. This is done to make high profits
What Are the Benefits of the Price System?
- It informs the producers how much their product will cost to make.
- It encourages the producers to supply more as prices are high.
- As there will be more competitors, it gives the customers more choices in the market.
- It promotes efficient use of resources and produces products that customers want.
- The price system can cope with the demand changes that fluctuate overnight.