LAW OF DEMAND

LAW OF DEMAND

Law of demand explains the relationship between price of the commodity and its demand. The law states that there is inverse or negative relationship between the demand and price of the commodity, ceteris paribus i.e. other things being constant. It means if the price of the commodity increases, the demand for commodity decreases and if the price of commodity falls, the demand for commodity increases.

ACCORDING TO MARSHALL

“The law of demand states that amount demanded increases with a fall in price and diminishes with the increase in price”.

ACCORDING TO SAMUELSON

“Law of Demand states that people will buy more at lower prices and buy less at higher prices, ceteris paribus”.

ACCORDING TO BILAS

“The Law of Demand states that other things being equal, the quantity demanded per unit of time will be greater, the lower the price and smaller, the higher the price.”

ACCORDING TO FERGUSON

“The quantity demanded varies inversely with price”.

Thus, law of demand states that, other things being equal, there is an inverse relationship between quantity demanded and own price of the commodity.

ASSUMPTIONS OF THE LAW OF DEMAND

ACCORDING TO PROF. STIGLER AND BOULDING

The main assumptions of the law are:

  • No change in the tastes and preferences of consumers.
  • Consumer’s Income must remain the same. Marshall assumed that money income should not change. Milton Friedman thinks that real income should remain constant.
  • The prices of the commodities related to the commodity in demand should not change.
  •  There should be no change in the wealth of the consumers and their tastes.

The Other Assumptions of the law are:

  • There is no change in consumer’s preferences, tastes, habits and fashion etc.
  • The consumer expects there will be no change in the price of commodity in future.
  • There is no change in the government policy concerning demand and taxes.
  • There is no change in the distribution of income in the country.
  • It is also assumed that the consumer is rational and the consumer has perfect knowledge about the market.
  • The nature of commodity is normal. The law of demand does not apply to giffen goods.

EXPLANATION OF THE LAW OF DEMAND

The law of demand can be explained with the following table:

PRICE OF GOOD X QUANTITY DEMANDED OF GOOD X
1
2
3
4
5
5
4
3
2
1

The table shows the negative relationship between the quantity demanded and price. When the price is ₹1, the consumer makes purchase of 5 units. When price rises to ₹5, the quantity demanded decreases to 1 unit.

The law of demand can also be explained with the help of demand curve:

DEMAND CURVE
DEMAND CURVE

The above curve shows the quantity demanded on OX axis and Price of the commodity on OY axis. DD is the downward sloping curve showing the negative relationship between price and quantity demanded. When the price is ₹1, the consumer makes purchase of 5 units. When price rises to ₹5, the quantity demanded decreases to 1 unit.

WHY DEMAND CURVE SLOPES DOWNWARD?

Downward slope of demand curve indicates the more is purchased in response to fall in price. The reasons why demand curve slopes downward can be explained as follows:

LAW OF DIMNISHING MARGINAL UTILITY

The law of diminishing marginal utility states that as more and more units of commodity are consumed, the marginal utility derived from each successive or additional unit becomes less and less. Accordingly, for each additional unit of the commodity, the consumer is willing to pay less and less price.

INCOME EFFECT

Income effect refers to the effect on quantity demanded when the real income of buyer changes due to change in the price of the commodity. With the fall in price, the real income increases and with the rise in price, the real income falls. Due to this, the law of demand applies and demand curve slopes downward from left to right.

SUBSTITUTION EFFECT

Substitution effect refers to the substitution of commodity having high price with the commodity having low price. It leads to increase in demand for commodity having low price and decrease in the demand of commodity having high price. Hence, more demand is made at lower price and less demand is made at higher price, makes the demand curve slopes downward.

SIZE OF CONSUMER GROUP

When the price of the commodity is high, few people can afford it and can buy. When the price of good falls, the more people can afford it and can buy. This leads to the applicability of law of demand as with the fall in price the more consumers start consuming the goods and demand increases or with the increase in price, less consumers consume the commodity and demand decreases.

ALTERNATIVE USES

There are some commodities which have alternative uses like milk. When the price of these goods increases, people use them in small quantities and for limited use only. Accordingly, demand falls. On the contrary, if the price decreases, the good will be put to many uses, which make it demanded more by consumers. This leads to the applicability of law of demand and demand curve slopes downward.

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