Demand curves slope downwards

The first law of demand states that price and quantity demanded are inversely related. This is because as the consumption of a good increases, the satisfaction derived from consuming more of the good (per unit of time) will eventually decline. The technical term for this phenomenon is the law of diminishing marginal utility (DMU).

Economics textbooks tend to define the demand curve as the relationship between price and quantity – i.e. that as the price of a good falls, we wish to purchase, have, use or consume more of it.

This is true. But the underlying reason that demand curves slope downwards is because the more we have of a good the less we value additional units. We rank-order our preferences, and apply successive units of our budget to acquire less and less urgent desires. And because we live in a world of scarcity, we satisfy our most pressing needs first. Hence those early units are worth more to us.

One of the most common complaints about demand curves is that they oversimplify reality, but this is actually their primary strength. It’s important here to underline the fact that demand curves only show the relationship between price and quantity. If any other variable changes, the demand curve will shift. In reality, of course, such change is ubiquitous. But that doesn’t make demand curves irrelevant; it just means we have to be careful how much we can attribute to them. The language we tend to use is that changes in price will affect quantity demanded (i.e. a movement along a demand curve). Changes in any variable other than price will affect demand (i.e. cause a shift in the entire demand curve). Examples of non-price factors that will cause a demand curve to shift include:

• Income
• The price of related good
• The number of consumers
• Expectations about future price movements
• Changes in preferences.

If any of the above changes, our original demand curve becomes outdated.

The first law of demand doesn’t imply that people always respond to price changes, just that there is a possible price change that will create a change in behaviour. As Will Wilkinson has argued, economic laws are not strict laws of nature, and therefore “counterexamples are not ipso facto falsifying, and the law of demand is never replaced with a better, more empirically adequate law”. In fact, the law of demand, “captures a ubiquitous regularity of human behaviour that is abundantly confirmed every moment of every day, and without which there would be no science of economics”.