Google
Wednesday 
October 18, 2017 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
LORENZ CURVE: In general, a diagram illustrating the degree of inequality and concentration for a group. This is accomplished by plotting the cumulative percentage of a total amount obtained by cumulative percentages of the group. A common use of the Lorenz curve is the distribution of income, in which the cumulative percentage of income is measured on the vertical axis and the cumulative percentage of the population is measured on the horizontal axis. Perfect equality is indicated by a 45-degree line (that is, 10% of the population has 10% of the income, 20% of the population has 20% of the income, etc.). The actual Lorenz curve inevitably lies below the 45-degree line. The extent that the Lorenz curve differs from the 45-degree line indicates the extent of inequality.

Visit the GLOSS*arama


LAW OF DEMAND:

The inverse relationship between demand price and the quantity demanded, assuming ceteris paribus factors are held constant. This fundamental economic principle indicates that a decrease the price of a commodity results in an increase in the quantity of the commodity that buyers are willing and able to purchase in a given period of time, if other factors are held constant. The law of demand is one of the most important principles found in the study of economics.
The law of demand is the scientific relation between demand price and quantity demanded that captures the demand side of the market. When combined with the law of supply (or other relevant supply principles) the result is the market model. The market provides a powerful tool for analyzing exchanges, resource allocation, and efficiency.

What Does It Mean?

The inverse relation of this law means that buyers are willing and able to buy more of a good if the price is lower and less of a good if the price is higher. From a scientific method perspective, this indicates that price causes quantity demanded. Or more specifically that a change in the demand price causes a change in the quantity demanded.

Working the Curve

Demand Curve
The law of demand is conveniently illustrated by a demand curve. In particular, it is illustrated by the negative slope of a demand curve, such as the one presented to the right. The negative slope of the demand curve means that higher prices are related to smaller quantities and that lower prices are related to larger quantities. Price goes up, quantity goes down. Price goes down, quantity goes up.

Two Effects

An initial look into why the law of demand exists reveals two effects--income effect and substitution effect.
  • Income Effect: This is the observation that a change in the price of a good alters the purchasing power of income. If the price increases, then buyers are able to buy a smaller quantity with available income. If the price decreases, then buyers are able to buy a larger quantity with available income. A change in price induces an inverse, or opposite, change in the quantity demanded.

  • Substitution Effect: This is the observation that a change in the price of a good alters the relative prices of substitute goods, which then motivates buyers to buy more or less of the substitute goods, and less or more of this good. If the price increases, then the price of substitute goods become relatively lower, inducing buyers to buy more of those goods and a smaller quantity of this good. If the price decreases, then the price of substitute goods become relatively higher, inducing buyers to buy less of those goods and a larger quantity of this good. A change in price induces an inverse, or opposite, change in the quantity demanded.

Looking Into Utility

Further support of the law of demand is provided by the analysis of utility and consumer demand theory. The inverse relation between demand price and quantity demanded can be tentatively explained through two related notions of consumer behavior.
  • Diminishing Marginal Utility: This notion states that the extra satisfaction obtained from a good declines as larger amounts are consumed. If buyers receive less satisfaction, then they are willing to pay a lower price, which generates the law of demand. The downside of this explanation is the inability to measure the actual utility derived from consuming a good.

  • Decreasing Marginal Rate of Substitution: The notion states that the relative satisfaction obtained from a good declines as larger amounts are consumed (and smaller amounts of other goods are consumed). In this case, if buyers receive relatively less satisfaction, then they are willing to pay a relatively lower price. The law of demand is implied by this analysis by using the ceteris paribus assumption that other factors (including other prices) remain unchanged. The advantage of this explanation is that only a ranking of preferences is needed. There is no need to actually measure utility.

An Exception

While the law of demand is a well-documented, extensively tested economic principle, it is not without exception. That exception is termed a Giffen good. A Giffen good is one in which a change in price causes quantity to change in the same direction. An increase in price causes an increase in quantity and a decrease in price causes a decrease in quantity.

A Giffen good exists because the good in question is an inferior good (an increase in income causes a decrease in demand) and the income effect overwhelms the substitution effect. Giffen goods are extremely rare and generally only surface if buyers spend a substantial portion of their income on an inferior good.

<= LAW OF COMPARATIVE ADVANTAGELAW OF DIMINISHING MARGINAL RETURNS =>


Recommended Citation:

LAW OF DEMAND, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: October 18, 2017].


Check Out These Related Terms...

     | demand schedule | demand curve | demand space | demand determinants | consumer surplus | change in demand | change in quantity demanded | law of supply |


Or For A Little Background...

     | demand | demand price | quantity demanded | market | quantity | price | unlimited wants and needs | economic analysis | exchange | scarcity | good | service | satisfaction | ceteris paribus |


And For Further Study...

     | market demand | competition | value | consumer sovereignty | competitive market | efficiency | income effect | substitution effect | exchange | utility | utility analysis | consumer demand theory | elasticity | price elasticity of demand | law of diminishing marginal utility | consumer equilibrium | marginal utility and demand | consumer demand theory | utility analysis |


Search Again?

Back to the WEB*pedia


APLS

RED AGGRESSERINE
[What's This?]

Today, you are likely to spend a great deal of time at a garage sale hoping to buy either a pair of leather sandals that won't cause blisters or clothing for your kitty cats. Be on the lookout for celebrities who speak directly to you through your television.
Your Complete Scope

This isn't me! What am I?

Sixty percent of big-firm executives said the cover letter is as important or more important than the resume itself when you're looking for a new job
"Executives who get there and stay suggest solutions when they present the problems. "

-- Malcolm Forbes, business executive

JEP
Journal of Economic Perspectives
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback



| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2017 AmosWEB*LLC
Send comments or questions to: WebMaster