The Law Of Demand

The law of demand states that, all other things being equal, the quantity of a good or service is a function of price. In general, that means less is bought at higher prices, and more is purchased at lower prices. This definition makes sense -- you only have so much money to spend, and if the price of something goes up, you can afford less of it.
The demand schedule tells you exactly how much of the good or service is bought at any given price. This relationship is portrayed by the demand curve, where the quantity is on the horizontal or xaxis, and the price is on the vertical or y axis.
If the quantity bought changes a lot when the price does, then it's called elastic demand. An example of this is ice cream. You can easily get another dessert, or none at all, if the price rises too high.
If the quantity doesn't change much when the price does, that's called inelastic demand. An example of this is gasoline, because you need to buy it regardless of the price.
This relationship holds true as long as "all other things remain equal." That part is so important that economists use a Latin term to describe it -- ceteris paribus. The "all other things" that need to be equal under ceteris paribus are the other determinants of demand. In addition to price, they are prices of related goods or services, income, tastes or preferences, and expectations. For aggregate demand, the number of buyers in the market is also a determinant.
If the other determinants change, then consumers will buy more or less of the product even though the price remains the same. That's called a shift in the demand curve.
Law of Demand Explained
A great example of how the law of demand works is how airlines have responded to higher oil and jet fuel prices. They needed to buy less fuel but still offer the same number of flights. They've done this by buying more fuel-efficient planes, filling all seats, and changing operations to improve efficiency. As a result, they've raised seat-miles per gallon from 55 in 2005 to 60 in 2011. The law of demand would describe this as the quantity of fuel demanded by the airlines dropped as the price rose. Here's a real-life example of how this works in the demand schedule for beef in 2014.
Of course, all other things were not equal during this time period. In fact, demand for jet fuel was further lessened because airlines' income also dropped at the same time. The2008 global financial crisis meant that travelers cut back on their demand for airline travel. The airlines expectations about the price of jet fuel also changed -- they realized it would probably continue to rise over the long term. However, the other two determinants of airline's demand for jet fuel stayed the same: they couldn't switch to another fuel, and their tastes or desire to use jet fuel didn't change. (Source: EIA, High airline jet fuel costs prompt cost-saving measures)
Retailers understand the law of demand every time they offer a sale. In the short-term, all other things are equal. That's why sales are usually very successful in driving demand. Shoppers respond immediately to the advertised price drop. This works especially well during massive holiday sales, such as Black Friday and Cyber Monday.
The Law of Demand and the Business Cycle
Politicians and central bankers understand the law of demand very well. The Federal Reserve's mandate is to prevent inflation while reducing unemployment. During the expansion phase of the business cycle, the Fed tries to reduce demand for all goods and services by raising the price of everything. It does this with contractionary monetary policy. It raised the Fed funds rate, which raises interest rates on loans and mortgages. This has the same effect as raising prices, first on loans, then on everything bought with loans, and finally everything else.
Of course, when prices go up, so does inflation. That's not always a bad thing. The Fed actually has an inflation target of 2%. This sets an expectation that prices will increase 2% a year. This actually increases demand because people know that things will only cost more next year. Therefore, they may as well buy it now ceteris paribus.
During a recession, or the contraction phase of the business cycle, policy makers have a worse problem. They've got to stimulate demand when workers are losing jobs and homes, and they have less income and wealth. Expansionary monetary policy lowers interest rates, thereby reducing the price of everything. If the recession is bad enough, this doesn't lower the price enough to offset the lower income and, even worse, expectations of continued low income.
In that case, fiscal policy is needed. The federal government usually starts spending to create public works jobs, supplement the income of the unemployed by extending benefits, and cutting taxes. This increase the federal deficit, since the government's income through taxes is usually lower. However, this demand side economics says that, once confidence and demand are restored, the deficit will be reduced as tax receipts increase. https://zbigz.com/