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At the moment, the price of a new laptop computer is around $950.  What do you think would happen if the price of a laptop fell to only $650?  If you are able to answer this question, then you are already applying a rule that Economists call “the law of demand”.

The law of demand states that as the price of an item falls, the number of items sold will increase.  This applies regardless of whether we are talking about very expensive items like cars, or relatively inexpensive items like newspapers and chocolate bars.  As the law is consistent regardless of which product we are looking at, we can represent this relationship on a graph.

From this model we can begin to draw some basic conclusions.  At point A the price is relatively high, and therefore the quantity that is being sold is low.  If the seller decided to lower the price, then the market might move to point B on the graph.  At this point the price is lower, but the quantity that is being sold is higher.

Every day, producers make decisions about the price that they will charge for their goods and services.  If we were actually able to see the demand curve for a product, then this decision would be easy!  All we would need to do is multiply the selling price by the quantity being sold to determine the total level of sales for the firm.  If we did that at both point A and point B, we could determine which price was more profitable for our firm.

Unfortunately it is not quite this simple.  On this graph, we have only plotted the actions of consumers.  If we are going to be able to make meaningful predictions, we will need to consider how sellers will react to changes in prices as well.  For this to occur, you will need to learn about the law of supply.

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