The law of demand economics can often be very confusing. econometric formulas and impressive charts are sometimes impossible to understand. thankfully though, some economic ideas are completely obvious. one of these ideas is the law of demand. economists are always disagreeing with each other, but the law of demand is the only thing they all agree on. they all agree on it because it makes sense even tonon-economistslike you and me. demand is how much of the same good or service people would like to buy. the law of demand says that demand for something falls as its price rises. economists show this concept with the demand curve which you can see in figure 1 on page 12. the reason why the law of demand works is quite obvious: the money we have is limited. if something becomes more expensive, we will have less money available to spend on our other needs. if the product or service is not a necessity, we will decide to buy less of it. most rules have exceptions, but economists agree that there are very few exceptions to the law of demand. it even applies to basic necessities like water. when water becomes more expensive, people find ways to use less. when the government put higher taxes on petrol, people try not to use their cars so often. the fall in demand might be very small, but it is real. so price has an effect on demand, but the strength of the effect varies. the strength of the price / demand relationship is called price elasticity. economists use a simple econometric formula to measure price elasticity for a certain product in a particular market. this helps governments and companies set prices at the correct level for a particular time and plan price increases. don’t forget, though, that other things affect demand apart from price. for example, during a very cold winter, demand for heating fuel like gas or coal will rise at any price. if the winter is unusually warm, then demand for fuel will fall. economists say that these situations cause a shift in the demand curve. you can see this in figure 2. in figure 2, the curve is still the same shape because price still has the same effect on demand. however, something else has caused a general increase in demand at all prices. a rise or fall in people’s incomes, fashion, climate and many other things can influence demand in this way. e comprehension now read the text again and decide whether these statements are true or false. t d /f d 1.the law of demand is easy to understand. 2 the law of demand says that when people want more of something, its price rises. ithere are no exceptions to the law of demand. 4 price elasticity shows how much prices change when demand changes. 5 there are many reasons why people decide to buy something, not only price. 6 a shift in demand changes the shape of the demand curve.
