In economics, the law of demand states that the quantity demanded and the price of a good or service is inversely related, other things remaining constant. Therefore, the demand curve will generally be downward sloping, indicating the negative relationship between the price of a good or service and the quantity demanded.
Movement along the demand curve
If the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in quantity of good demanded by the consumer will be negatively correlated to the change in the price of the good or service. The change in price will be reflected as a move along the demand curve.
Shift in the demand curve
The demand curve will shift, move either inward or outward as a result of non-price factors. A shift in demand can be related to the following factors (non-exhaustive list):
- Consumer preferences
- Consumer income
- Change in the price of related goods (i.e. compliments)
- Change in the number of buyers
- Consumer expectations
Law of Demand
A demand curve, shown in red and shifting to the right, demonstrating the inverse relationship between price and quantity demanded (the curve slopes downwards from left to right; higher prices reduce the quantity demanded).
Though in general terms and specific to normal goods, demand will exhibit a downward slope, there are exceptions: Giffen goods and Veblen goods
Giffen goods
A Giffen good describes an extreme case for an inferior good. In theory, a Giffen good would display the characteristic that as price increases, demand for the product increases. In the real world application, there has not been a
true
example of a Giffen good, though a popular albeit historically inaccurate example is the purchase of potatoes (an inferior good) as prices continued to increase during the Irish potato famine.
Veblen goods
Some expensive commodities like diamonds, expensive cars, designer clothing and other high-price limited items, are used as status symbols to display wealth. The more expensive these commodities become, the higher their value as a status symbol and the greater the demand for them. The amount demanded of these commodities increase with an increase in their price and decrease with a decrease in their price. These goods are known as a Veblen goods.