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I know the law of demand which states that

if price of a product increases then the demand will decrease

In this, I think we assume that price is a function of demand. But I feel otherwise i.e.

if demand increases then the price of the good will increases

My reasoning:

If demand increases then the producers will capitalize on this fact and to increase their profits, will increase the price of the goods.

Where am I wrong?

Note: I have taken an introductory course on microeconomics as a minor and therefore know just the basic concepts only.

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  • $\begingroup$ For an exogenous change in price, you move along the demand curve and see that demand will decrease, you are correct. If demand increases however, you are shifting the whole demand curve up (or to the right), and the equilibrium price rises given the supply curve stays where it is. So basically, both of the things you describe are accurate, but not equal to each other. One is a shift along the demand curve, and one is shifting the actual demand curve. $\endgroup$ – Kitsune Cavalry Sep 20 '16 at 16:41
  • $\begingroup$ I couldn't quite understand you... why in the second case when the demand increases , can't we remain on the same curve? What ensures if the demand curve will or if we will move on the same demand curve? $\endgroup$ – ragvri Sep 20 '16 at 17:56
  • $\begingroup$ You must have gotten ripped off at your micro class if you didn't learn about shifts along a curve versus shifts of the curve itself. :P Essentially, think about whether you are referring to a shift in the demand curve, or a shift in quantity demanded. $\endgroup$ – Kitsune Cavalry Sep 20 '16 at 21:01
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The law of demand is a microeconomic law that states, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.

Now, when you say that "if demand increases then the price of the good will increase"", you aren't changing the price and based on the change in demand you are now predicting that the price would rise which is clearly against the law of demand as your "increase" in demand is obviously due to more user engagement, advertising, or some other external factors.

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Except you didn't go further:

If the demand increases and this leads to an increase in price -> price increase will then lead to a decrease in demand.

Remember that demand will decrease when price increases.

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If demand rises, prices rise in macroeconomic context.

It is called demand-pull inflation.

Aggregate Demand grows faster than Aggregate Supply bidding the prices up.

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If we assume that the demand increases will the price increases so it neglects the law because the law of demand of microeconomics is that "other things remaining same,when price of commodity increases the quantity demand decreases and vice versa". Therefore, the price is not depend upon the demand and price can also not predict through demand, demand is depend upon price and also demand can be predict through price..

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  • $\begingroup$ I think you're confusing demand with quantity demanded. $\endgroup$ – Herr K. May 20 '18 at 6:45

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