Law of Demand

 

Law of Demand

It states that other things remaining the same, the amount demanded increases with a fall in price and decreases with a rise in price. It means there is an inverse relationship between demand and price.

Assumptions under which law of demand is valid

This law will be applicable only if the below mentioned points are fulfilled.

1.     No change in price of related commodities.

2.     No change in income of the consumer.

3.     No change in taste and preferences, customs, habit and fashion of the consumer.

4.     No change in size of population

5.     No expectation regarding future change in price.

Understanding law of demand using demand schedule

This law can be explained with the help of demand schedule and demand curve as presented below:

Demand Schedule is a tabular representation of various combinations of price and quantity demanded by a consumer during a particular period of time. An imaginary demand schedule is given below:

The above demand schedule shows negative relationship between price and quantity demanded for a commodity.

Initially, when a price of a good is Rs.10 per kg, quantity demanded by the consumer is 10 kg.

As the price decrease from Rs.10 per kg to Rs.8 per kg and then to Rs.6 per kg, quantity demanded by the consumer increases from 10 kg to 20 kg and then to 30 kg respectively.

Further, fall in price from Rs.6 per kg to Rs.4 per kg and then to Rs.2 per kg, results in increase in quantity demanded by the consumer from 30 kg to 40 kg and then to 50 kg, respectively.

Thus, from the above schedule we can conclude that there is opposite inverse relationship in between price and quantity demanded for a commodity.

Understanding law of demand using demand curve

It is the graphical representation of demand schedule. In other words, it is a graphical representation of the quantities of a commodity which will be demanded by the consumer at various particular prices in a particular period of time, other things remaining the same.

We can show, the above demand schedule through the following demand curve:

In the figure above, price and quantity demanded are measured along the y-axis and x-axis respectively. By plotting various combinations of price and quantity demanded, we get a demand curve DD1 derived from points A, B, C, D and E.

This is a downward sloping demand curve showing inverse relationship between price and quantity demanded.

Limitations/Exceptions of law of demand

a.      Inferior goods/ Giffen goods

Some special varieties of inferior goods are termed as giffen goods. Cheaper varieties of goods like low priced rice, low priced bread, etc. are some examples of Giffen goods.

This exception was pointed out by Robert Giffen who observed that when the price of bread increased, the low paid British workers purchased lesser quantity of bread, which is against the law of demand. Thus, in case of Giffen goods, there is indirect relationship between price and quantity demanded.

b.     Goods having prestige value

Few goods like diamond can be purchased only by rich people. The prices of these goods are so high that they are beyond the capacity of common people. The higher the price of the diamond the higher the prestige value of it.

In this case, a consumer will buy less of the diamonds at a low price because with the fall in price, its prestige value goes down. On the other hand, when price of diamonds increase, the prestige value goes up and therefore, the quantity demanded of it will increase.

c.      Price expectation

When the consumer expects that the price of the commodity is going to fall in the near future, they do not buy more even if the price is lower.

On the other hand, when they expect further rise in price of the commodity, they will buy more even if the price is higher. Both of these conditions are against the law of demand.

d.     Fear of shortage

When people feel that a commodity is going to be scarce in the near future, they buy more of it even if there is a current rise in price.

For example: If the people feel that there will be shortage of L.P.G. gas in the near future, they will buy more of it, even if the price is high.

e.      Change in income

The demand for goods and services is also affected by change in income of the consumers.

If the consumers’ income increases, they will demand more goods or services even at a higher price. On the other hand, they will demand less quantity of goods or services even at lower price if there is decrease in their income. It is against the law of demand.

f.       Change in fashion

The law of demand is not applicable when the goods are considered to be out of fashion.

If the commodity goes out of fashion, people do not buy more even if the price falls. For example: People do not purchase old fashioned shirts and pants nowadays even though they’ve become cheap. Similarly, people buy fashionable goods in spite of price rise.

g.     Basic necessities of life

In case of basic necessities of life such as salt, rice, medicine, etc. the law of demand is not applicable as the demand for such necessary goods does not change with the rise or fall in price.

h.     Ignorance

If the consumer is not aware of the competitive price of the commodity, he purchases more of the commodity even at higher price. It is because high price commodity are generally considered as superior in quality. Such attitude and ignorance of the consumer makes the law of demand ineffective.

Adopted from: https://www.businesstopia.net/economics/micro/law-demand