13 Jan What Is the Law of Demand?

Discussion Postings: 

#1 Rationing Function of Prices

 An important concept in demand and supply is the rationing function of prices. What do economists mean when they say, “price floors and ceilings stifle the rationing function of prices and distort resource allocation”? Explain with an appropriate example.

#2 Reply

 1. Explain the law of demand. Why does a demand curve slope downward? Illustrate with an example.

What Is the Law of Demand?

The law of demand is one of the most fundamental concepts in economics. It works with the law of supply (Links to an external site.) to explain how market economies allocate resources and determine the prices of goods and services that we observe in everyday transactions.

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. 

Downward sloping of demand curve-when the price of a commodity decreases its demand (Links to an external site.) increases. The law of demand assumes that the other factors affecting the demand of a commodity remain the same.

Thus, the demand curve is downward sloping from left to right. 

https://www.investopedia.com/terms/l/lawofdemand.asp (Links to an external site.)

https://www.toppr.com/guides/fundamentals-of-economics-and-management/demand/causes-of-downward-slope/ (Links to an external site.)

https://www.economicshelp.org/wp-content/uploads/2014/09/ad-downward-sloping.png

#3 Reply

What are the major determinants of price elasticity of demand? Use those determinants and your own reasoning in judging whether demand for each of the following products is probably elastic or inelastic: (a) bottled water; (b) toothpaste; (c) Spam; and (d) Heinz ketchup.

Price elasticity of demand is defined as the percentage change in quantity demanded that results from a 1% change in price, and is abbreviated by using “Ed”. If Ed is greater than 1, consumers are quite responsive to a change in price and the product being evaluated is relatively elastic. If Ed is less than 1, the product is relatively inelastic, meaning consumers are not very responsive to a change in price. 

Major determinants to Ed:

1. Ease of Substitution: How many substitutes of that product are there available on the market?

2. Proportion of Income Spent on the Product: How significant is the product and the price change of the product? Consumers would be more responsive to changes for costs that are towards a necessity. 

3. Length of Time: Can you cut your demand of the product based on rising prices? Do you have other options when the price is high and rising?

4. Nature of the Good: Luxury vs. necessity; Is the product a need or a want, and can you cut out buying it.

(a) bottled water – elastic

(b) toothpaste – inelastic

(c) Spam – inelastic

(d) Heinz ketchup – inelastic