The Law Of Demand

Topics: Monetary policy, Federal Reserve System, Keynesian economics Pages: 2 (864 words) Published: February 6, 2015
The law of demand states that, all other things being equal, the quantity of a good or service is a function of price. In general, that means less is bought at higher prices, and more is purchased at lower prices. This definition makes sense -- you only have so much money to spend, and if the price of something goes up, you can afford less of it. The demand schedule tells you exactly how much of the good or service is bought at any given price. This relationship is portrayed by the demand curve, where the quantity is on the horizontal or xaxis, and the price is on the vertical or y axis.  If the quantity bought changes a lot when the price does, then it's called elastic demand. An example of this is ice cream. You can easily get another dessert, or none at all, if the price rises too high.  If the quantity doesn't change much when the price does, that's called inelastic demand. An example of this is gasoline, because you need to buy it regardless of the price.  This relationship holds true as long as "all other things remain equal." That part is so important that economists use a Latin term to describe it -- ceteris paribus. The "all other things" that need to be equal under ceteris paribus are the other determinants of demand. In addition to price, they are prices of related goods or services, income, tastes or preferences, and expectations. For aggregate demand, the number of buyers in the market is also a determinant.  If the other determinants change, then consumers will buy more or less of the product even though the price remains the same. That's called a shift in the demand curve. Law of Demand Explained

A great example of how the law of demand works is how airlines have responded to higher oil and jet fuel prices. They needed to buy less fuel but still offer the same number of flights. They've done this by buying more fuel-efficient planes, filling all seats, and changing operations to improve efficiency. As a result, they've raised seat-miles per...
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