Law of Demand: Definition, Function, Formula, Demand Curve

The law of demand – In economics, it cannot be separated from what is called demand and supply. These two things will always be related and cannot be separated. If we discuss the law of demand and supply in one article, it will take a very long time.

Therefore, on this occasion, we will discuss the law of demand and the function of the law of demand. So, watch this review to the end, Sinaumed’s.

Understanding the Law of Demand

Demand usually occurs in terms of buying and selling or being in the market. For example, the demand for an item to be purchased by consumers. In general, demand is the number of items purchased or requested at a certain price and time.

The law of demand is one of the most fundamental concepts in economics. The law of demand explains how a market economy allocates resources and determines the prices of goods and services.

The law of demand states that the more people want to buy something while the supply is limited, the higher the bid price for that item. Likewise, the higher the price of an item, the lower the quantity of goods that will be purchased by consumers or in a way, the purchasing power of consumers becomes lower.

Quoted from Investopedia , the law of demand is a basic principle of economics which states that at a higher price, consumers will demand a lower quantity of goods. In addition, the law of demand can be said as the amount purchased is inversely proportional to the price. If the price of an item falls, the demand for that item will increase. Conversely, if the price of an item increases, the demand for that item will decrease.

In other terms, the law of demand is a rule that explains the negative relationship between the price level and the quantity of goods or services demanded. So, between the price of goods and demand has the nature of the relationship in the opposite direction (negative). This is very logical because if the price of an item rises, the buyer will look for other goods as a substitute whose price has not increased.

Simply put, if the consumer’s nominal income remains constant, while the price of goods rises, then the consumer’s income will decrease. As a result, consumers will reduce the demand for these goods. Conversely, if the price of goods falls, consumers will reduce purchases of other goods and increase purchases of goods whose prices have decreased.

Consumers will buy economic goods to meet their most pressing needs first. Only then use each additional unit of the item to serve a sequentially lower-valued purpose.

Economics involves the study of how humans use limited means to satisfy unlimited wants. The law of demand focuses on that unlimited want. By nature, people prioritize the more urgent wants and needs over the less urgent in their economic behavior.

This carries over into how people choose among the limited means available to them. For any economic good, the first unit of the good the consumer obtains will tend to be used to satisfy the most urgent need.

Understanding the Law of Demand According to Experts

The following are some legal definitions of requests according to experts, including:

1. History and Markonah

According to Riwayanti and Markonah (2008), the demand function is the relationship between commodity prices and the quantity demanded or purchased assuming other variables are constant (ceteris paribus).

2. Gaspersz

In his book, Gaspersz (2011) explains the law of demand reads if the quantity of a product demanded by consumers is inversely or negatively related to the price of the product. Usually, this occurs assuming all demand variables are held constant.

The general understanding has been discussed above, starting from what is the law of demand and how is the relationship between demand and price. Then, to calculate quantitatively, a formula is needed to make it easier in existing calculations. That means, the law of demand cannot be calculated arbitrarily.

Sounds of the Law of Demand

As explained above, the sound of the law of demand is as follows:

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If the price of a product falls, the demand for that product will increase. Conversely, if the price of a product increases, the demand for that product will decrease.

In other words, the lower the price level, the greater the quantity of goods available demanded. Vice versa, the higher the price level, the less the quantity of goods that are willing to be demanded.

The law of demand says that if the price is lower, the demand or buyers will increase. And vice versa, if the price is more expensive then the supply will be less.

This happens because all want to seek satisfaction (profit) as much as possible from the existing price. If the price is too high, then the buyer may buy a little because they have limited money.

But for the seller, with a high price he will try to increase the number of goods sold or produced so that the profits will be even greater. High prices can also cause consumers or buyers to look for other products as substitutes for these expensive goods.

Factors Influencing The Law of Demand

The law of demand does not just happen, but is caused by several factors. Some of the factors that affect demand are as follows:
Consumer tastes

  1. Consumer income
  2. Future price forecasts
  3. Availability and prices of like, substitute and complementary goods
  4. Number / intensity of consumer needs
  5. The amount of time
  6. Peak-of-peak demand .

Demand Law Functions

Together with the law of supply, the law of demand helps us understand why things are valued at that level. The law of demand is also used in identifying opportunities to buy products, assets or securities that are perceived to be undervalued (or overpriced).

For example, a company may increase production in response to a price increase that has been driven by a surge in demand.

The following formula is used:

P = a-bQ
Q = a-bP

Information:

P = price of goods
Q = quantity demanded of goods
a = constant
b = slope or gradient

1. Request Function Formula

To find out the true value of the supply and demand functions, there is a formula that can be used as follows:

P – P1 = Q – Q1
_______________

P2 – P = Q2 – Q1

Information:

P = price
P1 = known price 1
P2 = known price 2
Q = demand
Q1 = known demand 1
Q2 = known demand 2

2. Explanation of the Request Function Formula

More simply, if we look back at the law of demand, this demand function shows that the price of goods and the quantity of goods demanded are inversely proportional.

Legal example of request function request.

For example, there is an online shop platform that is holding a flash sale plus free shipping, so buyers will order as many items as they can because they are cheap. To more clearly calculate the demand function, see the explanation and examples of demand law below:

Goods A has a price of Rp. 500.00, the quantity demanded is 60 units.

Meanwhile, if the price of the goods is Rp. 200.00, the number of requests will be 100 units. What is the function of the law of demand?

P1 = 500
P2 = 200
Q1 = 60
Q2 = 100

Completion:

Demand Curve

A law of demand for a good will increase when its price falls. Therefore, the demand curve is a depiction of a statement that is poured into a picture to make it easier to understand. This demand curve has a gradient or slope or negative slope.

That is, the slope of this curve decreases from the top left to the bottom right, thus indicating an inverse relationship between demand and price. The curve that decreases from the top left to the bottom right shows the ups and downs of a commodity.

Features of the Demand Curve

The main characteristics of the demand curve on the law of demand as follows:

1. The curve is in the form of a straight line

The first feature of the demand curve is its straight line.

2. The Movement of the Demand Curve is Affected by the Amount of Demand for Goods or Services

For example, if income increases, the curve will shift to the right because the quantity demanded increases. Conversely, the curve will shift to the left if public opinion or demand decreases.

3. The price of goods with the number of goods is inversely proportional

This means that if the price of goods increases, demand will decrease. Conversely, if the price of a good falls, the demand for it will increase.

4. The Curve Has a Negative Slope

Because the curve is drawn from the top left and then down. This shows that there is an inverse relationship between price and quantity demanded.

5. Form of the Demand Curve Function

The form of the demand curve function is Q = a-bP (‘Q’ is the quantity demanded, ‘a’ is a constant, ‘b’ is the slope or gradient, and ‘p’ is the price of the good).

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If the ceteris paribus factor changes , there will be a shift in the demand curve. When income increases, the demand curve shifts parallel to the right. If income decreases, the demand curve shifts to the left.

So, the influence of each factor affects the demand for movement and shifting .

Demand Elasticity

In the law of demand, there is a price elasticity of demand (PED). The elasticity of demand is a measure of the change in the amount of demand for goods or the amount of goods that will be purchased by buyers against the price of goods. However, the degree of this change varies. The difference can be due to the existence of certain goods, a small increase in price will result in a drastic decrease in demand. As for other goods, buyers are still willing to buy them even though the price rises sharply.

The difference in the law of demand is then measured as the elasticity of demand. More simply, the elasticity of demand shows the percentage change in quantity demanded, if there is a 1% increase in price and all other things being equal. Because the quantity demanded almost always falls when the price rises, the elasticity of demand is usually negative, although practitioners sometimes do not write a negative sign.

The demand for an item is said to be elastic if its elasticity is greater than 1. This means that a 1% increase in price results in a greater than 1% decrease in demand. On the other hand, inelastic is demand with elasticity less than 1.

In addition, there is a perfectly elastic demand classification with unitary elasticity ∞ (elasticity 1), perfectly inelastic (0), and perfectly elastic (∞).

Some goods have positive elasticity, so they are anomaly of the law of demand, for example goods that are status symbol goods ” Veblen goods ” or Giffen goods .

While a business cannot be 100% determined by how consumers react, the goal of every marketing team and product is to increase conversions, usage, and positive brand views. The existence of pricing, more specifically the pricing strategy of a business is one area that can be applied to marketing and products that still contain a lot of guesswork.

Phenomenal marketing and product development can cause price increases while selling maintains the same conversion rate. However, setting prices and communicating developments should not be done haphazardly so as to deviate from the law of demand.

Therefore, it requires optimization and price changes over a long period of time and should not be done in a hurry or instant. Fortunately, there are ways to guide this, namely with pricing strategies, microeconomics, and marketing/product basis which is the theory of price elasticity of demand or price elasticity which can increase demand by making product offers more inelastic or through marketing and product development.

How Elasticity Works

The law of demand will guide the relationship between price and quantity purchased. So the quantity purchased has an inverse relationship with the price. When the price goes up, there are fewer buyers. The elasticity of demand will then tell how much the quantity decreases as the price increases.

If an item has elastic demand, it means that consumers will do a lot of comparison shopping. Consumers will do this when they are not desperate to have it or don’t need it every day. They will also compare with other stores when there are many similar choices.

How to Calculate Elasticity of Demand

There are three main types of price elasticity of demand:

  1. Elastic
  2. Unit elasticity
  3. Not elastic

Before studying this, you must first understand the law of demand and the law of supply.

To calculate the price elasticity of demand (PED), the following equation is used.

% Price change (P) = (New price, old price) / average price

PED is always given as an absolute value or a positive value, because we are interested in magnitude.

Elastic Demand and Non-Elastic Demand

The opposite of elastic demand to the law of demand is inelastic or inelastic demand. There is demand changing more than price with elastic demand. Price changes more than demand with inelastic demand. That is, consumers are willing to tolerate larger price changes before they change their behavior.

The price of a product with inelastic demand may suddenly rise, but consumers are unlikely to consider alternatives or have no alternatives to consider. Usually, elastic demand is more often applied to luxuries. So that consumers have more choices in terms of luxury, including the choice not to buy anything.

On the other hand, staple goods such as food usually have an inelastic demand. For example, if the price of fruit and vegetables suddenly increases, the law of demand that operates here means that whether they like it or not, consumers have to buy and cannot simply not eat fruits or vegetables. They end up being forced to buy at a higher price.

Finally, there is unit elastic demand. Basically, the perfect middle ground between inelastic demand and elastic demand under the law of demand is that there is unit elastic demand. When demand changes by exactly the same amount as price, it is called unit elastic demand.