The document discusses the law of demand, which states that consumer demand for a good decreases when the price increases, assuming other factors remain constant. It provides examples to illustrate how demand changes with price, such as buying more shirts when they are on sale. The law of demand is one of the fundamental economic concepts and helps explain how markets set prices and allocate resources.

1. Definition of 'Law Of Demand'
A microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service
will decrease, and vice versa. The law of demand says that the higher the price, the lower the quantity demanded, because consumers’ opportunity
cost to acquire that good or service increases, and they must make more tradeoffs to acquire the more expensive product.
Investopedia explains 'Law Of Demand'
The chart below depicts the law of demand using a demand curve, which is always downward sloping. Each point on the curve (A, B, C) reflects a
direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on.
The law of demand is so intuitive that you may not even be aware of all the examples around you.
-When shirts go on sale, you might buy three instead of one. The quantity that you demand increases because the price has fallen.
-When plane tickets become more expensive, you’re less likely to travel by air and more likely to choose the less expensive options of driving or
staying home. The amount of plane tickets that you demand decreases to zero because the cost has gone up.
The law of demand summarizes the effect price changes have on consumer behavior. For example, a consumer will purchase more pizzas if the price
of pizza falls. The opposite is true if the price of pizza increases. John might demand 10 pizzas if they cost $10 each, but only 7 pizzas if the price rises
to $12, and only 4 pizzas if the price rises to $20.
The law of demand is one of the most fundamental concepts in economics. It works with the law of supply to explain how market economies allocate
resources and determine the prices of goods and services.

2. Indifference curve analysis
• Indifference analysis is an alternative
way of explaining consumer choice
that does not require an explicit
discussion of utility.
• Indifferent: the consumer has no
preference among the choices.
• Indifference curve: a curve showing
all the combinations of two goods (or
classes of goods) that the consumer is
indifferent among.

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Price is:
• The money charged for a product or service
• Everything that a customer has to give up in order to acquire a product or service
• Usually expressed in terms of £
The price a business charges for its product or service is one of the most important business decisions
management make.
For example, unlike the other elements of the marketing mix (product, place & promotion), pricing decisions affect
revenues rather than costs.
Pricing also has an important role as a competitive weapon to help a business exploit market opportunities.
Pricing also has to be consistent with the other elements of the marketing mix, since it contributes to the
perception of a product or service by customers.
Setting a price that is too high or too low will - at best - limit the business growth. At worst, it could cause serious
problems for sales and cash flow.
So pricing is important. The bad news for entrepreneurs is that pricing is a really tough to get right. There are so
many factors to consider, and much uncertainty about whether a price change will have the desired effect.
The law of demand states that, for nearly all products, the higher the price the lower the demand. In other
words, sales will fall if prices are put up. However higher prices can also mean higher profits.

4. Introduction of law of demand
One of the fundamental principles in
Economics is known as the law of demand.
Demand refers to the relationship between the
price of a good or a service and the quantity
demanded that consumers are willing and able
to buy at a certain price. According to the law
of demand, price and quantity demanded are
inversely related and if all other factors that
affect consumer demand are held constant, as
the price of a good increases (decreases) the
quantity demanded for that particular good
decreases (increases). Besides, the law of
demand is one of the most important
managerial tools because it assists managers in
forecasting changes in product and input
prices.

5. Elasticity of demand
al Revenue and the Price Elasticity of
Demand
How does total revenue, P×Q, change
when we
increase the price?
Revenue increases if demand is inelastic,
Revenue decreases if demand is
elastic, and
Revenue stays the same if demand is unit
elastic.

6. Price elasticity of demand
Income Elasticity of Demand
Income elasticity of demand =
Percentage change in quantity demanded
Percentage change in income
ªQ I
= ___ ___
ªI Q
• For normal goods, the income elasticity of
demand is positive.
• For luxury goods, the income elasticity of
demand is greater than 1.
• For inferior goods, the income elasticity of
demand is negative.

7. The price elasticity of supply
The Price Elasticity of Supply
Price elasticity of supply =
Percentage change in quantity supplied
Percentage change in price
ªQ P
= ___ ___
ªP Q
• The price elasticity of supply is positive.
• The closer the industry (firm) is to full
capacity, the lower the price elasticity of
supply.
• The price elasticity of supply is greater in
the long run, as firms are more free to adjust
their behavior and adjust their capacities.