Chapter 3, Problem 3.1LO

To determine

:

The Law of Demand.

Concept Introduction:

Law of Demand:

The law of demand states that the quantity demanded of a good decreases with an increase in its price level and vice versa. In other words, there is an inverse relationship between the quantity demanded and price of a good or a service. The law is based on the assumption of ceteris paribus , that is, when all other factors affecting the demand remain constant.

Explanation of Solution

:

The law of demand is a fundamental economic principle. The exogenous factors such as the consumer income, consumer tastes and preferences, prices of complements and substitutes are assumed to be constant.

The figure below shows a downward sloping demand curve from left to right based on the law of demand. When the price of the good is $30, the quantity demanded is 50 thousand units and when the price increases to $60, the quantity demanded falls to 20 thousand units and so on.

Algebraically, the law of demandis stated in partial derivatives (assuming Ceterus-Paribus) as follows:

  $\frac{\partial Q}{\partial P}\le 0$

Here,

‘ Q’= Quantity demanded of a good

‘ P’= Price of the good.

It implies that for a unit in price the change in the quantity demanded is $\le$ 0 or negative proportional or positive greater than proportional.