LAW OF DEMAND

LAW OF DEMAND

Lower the price, higher the demand. Higher the price, lower the demand. If other things remain constant.

Demand curve D shows that demand for commodity-X extends from OQ to OQ1 when it's price falls from OP to OP1. In fact, downward slope of demand curve itself is an

expression of the law of demand. 

ASSUMPTIONS OF LAW OF DEMAND

Law of demand holds good when "other things remain constant. Here other things refers to factors other than own price of the commodity. 

(1) Tastes and preferences of the consumers           remain constant. 

(2) There is no change in income of the     

      buyers. 

(3) Prices of the related goods do not change. 

(4) Consumers do not expect any significant 

      change in the availability of the commodity 

      in near future. 

Why does Demand Curve Slope Downward? 

Downward slope of demand curve indicates that more is purchased in response to fall in price. Thus there is inverse relationship between own price of a commodity and it's quantity demanded. This can be explained in terms of following factors: 

(1) Law of Diminishing Marginal Utility: 

      According to this law, as consumption of a 

      commodity increases, marginal utility of 

      each successive unit goes on diminishing. 

      Accordingly, for each additional unit to be

      purchased, the consumer is willing to pay 

      less and less price. 

(2) Income Effect: Income effect refers to the 

      effect on quantity demanded when real 

      income of the buyer changes owing to 

      change in price of the commodity. With a

      fall in price, real income increases. 

      Accordingly, demand for the commodity

      expands. 

(3) Substitution Effect: Substitution effect

      refers to substitution of one commodity

      for the other when it becomes relatively

      cheaper. Thus, when own price of 

      commodity-X falls, it becomes cheaper in

      relation to commodity-Y. Accordingly, X is

      substituted for Y. It is expansion of demand

      for commodity-X due to substitution effect. 

(4) Size of Consumer Group: When price of a 

      commodity falls, many more buyers can 

      afford to buy it. Accordingly, demand for

      the commodity expands. 

(5) Different Uses: A good may have several 

      uses. Milk, for example, is used for making

      curd, cheese and butter. If price of milk 

      reduces, it will be put to different uses. 

     Accordingly, demand for milk expands. 

Exceptions to the Law of Demand

Law of demand has some exceptions as well. 

There are some commodities whose demand

expands when their price rises and contracts

when their price falls. In such situations, the 

demand curve slopes upward from left to right. Following are some notable exceptions to the law of demand: 

(1) Articles of Distinction: According to 

      Professor Veblen, there are certain goods

      which are 'articles of social distinction'. 

      These articles are demanded only because

      their prices are very high. If their prices fall, 

      they will no longer be considered as 

      articles of distinction and their demand 

      will shrink. Thus, these goods defy the law

      of demand. For example: - Precious 

      diamonds and vintage cars. 

(2) Giffen Goods: Giffen goods are highly

      inferior goods, showing a very high 

      negative income effect. As a result, when 

      price of such commodities falls, their 

      demand also falls, even when they happen

       to be relatively cheaper than other goods. 

      This is popularly known as 

       'Giffen Paradox'. 

(3) Irrational Judgement: Law of demand fails

      when consumers judge the quality of a

      commodity by its price. It is an irrational

      judgement. Perhaps is owing to a huge 

     price difference between 'organic' and

     'non-organic' products in the market, that 

     richer sections of the society consider

    organic products as of very high quality. 

    Accordingly, quantity demanded of these

    products has tended to rise even when

    their prices are extremely high. 

Demand Curve Slopes Upward When Law of Demand Fails