**Definition:** The law of demand is a microeconomic concept that states that when the price of a product decreases, consumer demand for this particular product increases, provided that all other factors that affect consumer demand remain equal (ceteris paribus).

## What Does Law of Demand Mean?

In the effort to maximize the utility of consumption, consumers base their purchasing decisions mainly on two factors: their income and the existence of similar products that may meet the same need (substitute products). Therefore, if the price of a product increases, consumers are expected to buy fewer units of this product, if their income is not sufficient to sustain the same quantity and if there is a substitute product that can satisfy their needs.

Here’s a graphical representation of the law of demand also known as the demand curve.

Let’s look at an example.

## Example

John has decided to throw a party for his 30th birthday. According to his budget, he plans to spend $25 maximum on beef, so he goes to the supermarket and buys 4lbs. beef for $6.25 per lbs. A few days before the party, he goes to buy another 4lbs. of beef, but he realizes that the price of beef has increased to $7.41 per lb. So, now he would need $29.6 to buy his beef supplies. Will John spend more than $25?

The answer is no. John has set a budget of $25 for beef, so now he is looking for a substitute product to satisfy his need. Pork is a substitute product for beef and it costs $2.80 per lb., so 4 lbs. of pork would cost $11.2 instead of $25. John is actually saving $13.8, which he can spend on other supplies. Would John buy more beef, if the price had decreased?

The answer is yes. If the price of beef decreased to $5.55 per lbs., John would buy 4.5 lbs., instead of 4 lbs., for $25. So, the factors that determine John’s purchasing decision are his income ($25) and the existence of a substitute product (pork).

John is simply an example of the economy as a whole. As the prices of a good increase, the quantity demand for the product falls because consumers start to look for substitutes. The law of demand states that the opposite is true when the price decreases.