In market economy demand, the price and the offer are considered as the main elements. People who are engaged in business activity have to understand what is the law of demand and as it is correct to them to use. It can be cumulative, production, individual and so on.
In what does the law of demand consist?
The principle of reduction of volume of demand because of jump of price for products and vice versa – the law of demand (the schedule in the drawing). If to look from the mathematical party, then it designates that indicators of demand and cost are in inverse relation. In definition of the law of demand one more its feature is specified: reduction of demand can happen because of market saturation by these goods. In most cases it occurs when the population at low price bought a lot of products, and at once there came the situation when the number of purchases is reduced.
Principles of the law of demand
There are certain principles on which the law of demand is based.
- If the price is lower, then more buyers will go to the transaction. It designates that there are goods and services, the price to which is capable to change the number of buyers for them. There are also goods at the change in price for which also the number of purchases of these goods and services changes.
- The principle of the decreasing marginal utility. Finding out what means the law of demand, it is worth deciphering value of this principle, so, he specifies that consecutive use of any goods or services reduces their demand, but if the price of them is reduced, then consumers will want to buy additional units of these goods.
- Income effects and replacements. The first concept designates that at depreciation on a commodity unit the purchasing power grows. The consumer will be able not only to buy a large number of these products, but also something else. As for replacement in the law of demand, it treats the interconnected goods which can be related or one purpose. At increase in the cost on one of these goods, the buyer will choose an alternative.
Law of cumulative demand
By means of this parameter reflect communication between the output and the general level of the economic prices in economy. It is the sum of all planned expenses on total products and services. Effect of the law of demand means accounting of four important components: net export, consumer spending, investment demand from third-party firms and government procurement.
Laws of derivative demand
Production demand is secondary, and it is defined by requirement on products which are received by means of production factors. Four laws of production demand of Marshall-Hicks which characterize change of elasticity of demand for work are known.
- The essence of the law of demand shows its elasticity at the price of the made product.
- To replace a certain type of activity, it is possible using other factors of production.
- Elasticity of the offer of other factors of production.
- Part of costs for activity in a total amount of costs of production. In this form the law is implemented when the elasticity of replacement of factors of production is less, than demand for a product.
The law of the decreasing demand
The essence of this law defines that the price of any goods increases at the invariance of other indicators of the market, and demand will fall. It was created by the French mathematician O. Kurno. The law of the falling demand under the influence of different factors works as a trend. The aspiration of buyers to buy goods depends not only it its costs, but also on degree of need of these products, that is its usefulness.
Law of individual demand
Understand demand from separate subjects of economy as individual demand. Apply this term and to the description of demand at the microlevel or at the macrolevel. The fundamental law of demand individual specifies that the satisfaction of requirements occurs under such circumstances: a large number of paid goods and services, products has the substitutes, and when choosing between them, it is necessary to compare additional expenses and benefits.
Law of demand for a resource
The demand of a resource depends on how it can be used also from the price of it. The law of demand shows if the price of a resource in the market quickly grows, then it will be uninteresting to buyers therefore balance of crossing of the curve which is responsible for supply and demand is of great importance. Demand for a resource is formed on the basis of a limit product of production and elasticity of demand for a resource. It is dependent on demand for the goods made with use of this resource.
The law of demand in labor market
In this sphere demand is expressed by the number of work which potential employers need. Laws of formation of demand for work show that it depends on requirements of production and performance. Besides, qualification of the worker, the used technologies, the amount of the capital, quantity and quality of natural resources, and still production management will matter. The law of demand shows that the more the need for creation of new products, the more will be the need for human resources.
Dependence of the law of demand
There is a certain list of factors which can affect value of demand:
- Tastes of consumers. The preference influences similar fashion, advertizing, traditions and quality of products. If people buy similar goods in a large number, then demand will grow therefore the curve will be transferred to the right side.
- Income level. Describing what is the law of demand and factors affecting demand it is necessary to specify that growth of income leads to increase in demand for a large number of goods and vice versa.
- Price of other goods. Here the cost of goods which can replace or supplement each other means.
- Expectations of consumers. If people expect any changes connected with the cost of goods, the salary or other actions of the government, then it can influence their desire to buy goods at this moment that will change demand. The rush leads to schedule shift to the right.
- Pent-up demand. The similar effect has connection with the available fluctuations of demand in time which have a certain recurrence, so, they can be annual, week, seasonal and so on.
- Such factors can also influence the law of demand: goods type, number of buyers, advantage and quality of goods, advertizing and so on.
Examples of effect of the law of demand
Better to understand this subject, it is necessary to track such chain of events. Products cost has the greatest influence on demand. Sometimes the buyer should refuse one goods in favor of another. In examples the law of demand assumes that if the consumer income is not to increase, and the price at the same time will grow, then and demand will fall. If the seller increases cost goods, then together with it solvent demand decreases therefore, expensive goods the buyer for the same sum will get less and if the price of others remains invariable, then will choose them.
Exceptions of the law of demand
There are certain situations which are an exception therefore the law of demand does not extend to them.
- If the price is sign of quality. When the prices grow, people plans to receive more usefulness on cost unit, than at acquisition of cheap goods. The price begins to be considered a certain advertizing, and it moves the schedule of demand to the right side until buyers do not apprehend its real reliability.
- Expectation of price dynamics. Such effect is formed when takes place to be a speculative factor. The law of demand in case of the raised rush does not affect goods that the price or withdrawal of goods from sale can be provoked by expectation of significant growth.
- Prestigious demand. Such concept of economy is connected with demonstrative and prestigious consumption. Consumers, buying something expensive, seek to emphasize the exclusiveness. They unite in a certain group to which other people seek to imitate.
- Giffen's effect. A rare phenomenon, the price of goods increases and it provokes increase in demand. It is low-quality, but figures prominently in a consumer basket. When the price of such product grows, the budget of needy consumers suffers very strongly.