The Law of Demand

The one rule behind every purchase you make.

3 min readQuick check inside

The big idea

When the price goes up, people buy less. When it goes down, they buy more. Everything else being equal, the demand curve slopes down.

A demand schedule is just a table: at $5 people buy this many coffees, at $4 this many, and so on. Plot it with price on the vertical axis and quantity on the horizontal, and you get a demand curve that slopes down from left to right.

There are a few reasons it slopes down. When coffee is cheaper, you can afford more (the income effect). Coffee also looks better compared to tea (the substitution effect). And each extra cup gives you a little less joy, so you’ll only buy it at a lower price (diminishing marginal utility).

The common mistake: a price change does not move the curve. It moves you along the curve to a new point. The curve itself only shifts when something other than price changes. That’s the next lesson.

Spot it in the wild

GasAt $5 a gallon people drive less, carpool and combine trips. That’s the law of demand at the pump.
SalesBlack Friday works because lower prices move everyone down the demand curve to buy more.
Dynamic pricingAMC charging different prices for different seats is a bet on how demand changes with price.

Quick check

Tap an answer.

The price of concert tickets drops and more people buy them. On a graph, this is…

A change in the good’s own price moves you along the existing curve. Only other factors shift it.

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