Demand and the law of demand

Demand is the quantity of a good a consumer is willing to buy and able to afford, at a given price.

The demand function shows how demand depends on the price, X = f(P). The demand curve draws it, with price on the vertical axis and quantity on the horizontal.

The law of demand: other things being equal, when the price of a good falls, the quantity demanded rises, and vice versa. Price and quantity are inversely related.

Why? When bananas become cheaper, two things happen:

• Substitution effect: bananas are now relatively cheaper than mangoes, so she buys more bananas in place of mangoes.
• Income effect: her money now buys more: her purchasing power has risen. For a normal good, she buys more of it.

For normal goods both effects raise demand. (A rare exception is a Giffen good, whose demand can rise when its price rises.)

Linear demand: d(p) = a − bp. Demand falls by b units for each ₹1 rise in price, and becomes zero at p = a ÷ b. Example: d(p) = 24 − 3p. At p = 4, demand is 12; it is zero at p = 8.