The prices and quantities in the above figure point out a feature of demand: for practically every good or service that we might buy, higher prices are associated with smaller amounts demanded. Conversely, lower prices are associated with larger amounts demanded. This is known as the Law of Demand, which states that the quantity demanded varies inversely with its price. When the price of something goes up, the quantity demanded goes down. Likewise, when the price goes down, quantity demanded goes up.
The law of demand says that ceteris paribus when the price of a product is high, quantity demanded is low, and vice versa. In other words, other factors remaining the same, the demand for a product is inversely related to the price.
This is how people behave in everyday life—they normally buy more of a product at lower prices than they do at higher ones. All we have to do is to note the increased purchases at the mall whenever there is a sale. This is why economics is a social science: because it is the study of the way we behave when things around us change.
Market Demand Curve
So far we have discussed a particular individual’s demand for a product. Sometimes, however, we are more concerned with the market demand curve, the demand curve that shows the quantities demanded by everyone who is interested in purchasing the product. The below figure shows market demand curve for Mike and his friend Julia, we have assumed market to consist of only two people for simplicity purpose.
To get the market demand curve, all we do is add together the number of CDs that Mike and Julia would purchase at every possible price. Then, we simply plot the prices and quantities on a separate graph.
The market demand curve above is very similar to the individual demand curve in we looked at earlier. Both show a range of possible prices that might prevail in the market at a given time, and both curves are downward sloping. The main difference between the two is that the market demand curve shows the demand for everyone in the market.