Explain the Law of Demand - Research Paper Example

Law of Demand Law of Demand “The law of demand s that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded” (Investopedia, n. d). Supply and demand are two of the most vital terms in economics. When the price of a good becomes less the consumers may buy more or the demand for that good may increase and when the price increases, the demand may decrease. In other words, law of demand educate us that price and demand are inversely proportional.

This paper briefly explains law of demand with the help of an example and a graph. Law of demand and its characteristics(The Demand Curve, n. d)The above demand curve shows that when the price of a product increases, the demand decreases whereas the demand increases when the price decreases. For example, Butler (2009) has mentioned that the Australian government recently decided to cut the tariffs on imported cars by 5-10% (Butler, 2009). The above decision will definitely reduce the car prices in Australia and subsequently the demand for car may increase in Australian market.

Australians automobile industry is controlled mainly by Toyota, Ford, Holden and Mitsubishi. The new decision to cut down the taxes will help the above companies to sell more cars in Australian market by reducing the prices. The cut down of the tariffs and the prices of the vehicles will boost more economic activities across Australia as the above four companies will increase the supply of vehicles to Australia in order to exploit the favorable market condition. When supply increases, the price may come further down and more customers will participate in purchasing.

Most of the people are familiar with the demand law. People will never go after expensive goods if substitute products of similar quality with less prices are available in the market. On the other hand, in the absence of substitute products, only the rich people will buy the expensive goods and others will stay away from the market. It is difficult for the companies to survive in a market relying only on the buying abilities of the rich people. A product can succeed in the market, if it is able to catch the demand not only from the rich people, but even from poor people since poor people constitute the majority of the population in most of the countries.

It is not necessary that the demand for goods depend only on the price of the good. When a country acquires heavy economic growth, the goods previously less demanded may become more demanded in that country. For example, India is currently undergoing heavy economic growth and some of the expensive cars in the world are currently moving rapidly in Indian market. This is not because of the reduction in price, but because of the increase in Indian consumer’s ability to buy more expensive goods because of the economic growth.

In short, economic conditions can also affect the demand of a product apart from the price of the product.References1. Butler,G. (2009). Tariff cut: Bonus for new-car buyers?. The Age (November 20, 2009). Retrieved from http://theage.drive.com.au/motor-news/tariff-cut-bonus-for-newcar-buyers-20091120-iqjy.html2. Investopedia. 2009. Microeconomics. Retrieved from http://www.investopedia.com/terms/m/microeconomics.asp> 3. The Demand Curve. (n. d). Retrieved from http://ingrimayne.com/econ/DemandSupply/Demand3.html