What defines the law of demand in microeconomics?

The law of demand in microeconomics states that as the price of a good or service increases, consumer demand for it decreases, and vice versa.

The law of demand is a fundamental principle in microeconomics that describes the inverse relationship between price and quantity demanded. It is based on the basic economic concept of scarcity and choice, and it is used to explain and predict the behaviour of consumers in the market.

The law of demand is based on two key assumptions. Firstly, it assumes that all other factors affecting demand are held constant (ceteris paribus). This means that the law of demand only considers the relationship between price and quantity demanded, ignoring other factors like income, tastes and preferences, or the prices of other goods. Secondly, it assumes that consumers are rational, meaning they will always try to maximise their satisfaction or utility.

According to the law of demand, when the price of a good or service increases, consumers will buy less of it because it becomes more expensive relative to other goods and services. This is known as the substitution effect. On the other hand, when the price decreases, consumers will buy more of it because it becomes cheaper relative to other goods and services. This is known as the income effect.

The law of demand can be represented graphically with a demand curve, which is a downward-sloping line on a graph where the vertical axis represents price and the horizontal axis represents quantity demanded. The downward slope of the demand curve illustrates the inverse relationship between price and quantity demanded: as the price goes up, the quantity demanded goes down, and as the price goes down, the quantity demanded goes up.

However, it's important to note that the law of demand doesn't apply in every situation. There are certain goods, known as Giffen goods and Veblen goods, for which demand increases as the price increases. But these are exceptions to the rule, and in most cases, the law of demand holds true.