Section Navigation pg-8

When anything changes that affects purchase decisions, other than price, the demand curve shifts, or there is a change in demand. Some of the many factors, other than price, that affect purchase decisions are changes in: income, the price of related goods,4 expectations of future prices, seasons, climate, tastes and beliefs about product safety, age or income distribution of the population, population size and so on.

When we state the Law of Demand we are stating a relationship about price and desired quantity demanding when none of these other factors change. Thus, in every statement of the Law of Demand you will find a phrase such as "all else being equal," or "holding non-price factors constant" or "other things being equal," or "ceteris paribus" (other things being equal). Thus, we state the Law of Demand as follows

Law of Demand: With all relevant non-price factors held constant, if the price of a good or service increases, the desired quantity demanded will decrease; If the price of a good or service decreases, the desired quantity demanded will increase.

The With all relevant non-price factors held constant clause is a crucial part of the statement of this law. The effect of a change in these other factors can be so powerful that they can overwhelm the effect of price on demand. For example, changes in beliefs about the safety of flying in the U.S. were so profoundly altered after September 11th, 2001 that the price of a ticket became largely irrelevant to many when deciding whether or not to fly. Maybe it shouldn't be elevated to the status of a law, but as long as we remember the importance of all else being held constant type statements, the Law of Demand can be relied upon.5 In Section 3. Demand Shifts, we will explore in detail how these other factors affect demand.

back forward

Related goods are complements and substitutes. Complements are goods that are typically used together, like computers and CDRW drives. Substitutes are goods that can be substituted for one another (though not necessarily perfect substitutes), like videos and DVDs.


There may be exceptions to the law of demand. Beginning on page 15 of this section we discuss three possible exceptions.

Copyright © 1995-2005, Inc. - All Rights Reserved