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Law of demand in economics describes that demand for a commodity is related to price per unit of time. It is the experience of every consumer that when the prices of the commodities fall, they are tempted to purchase more. When the prices rise, the quantity demanded decreases. There is a inverse relationship between the price of a product and the quantity demanded.

Definition, Statement and Explanation:

The inverse relationship between demand (quantity) and price is discuss under the law of demand.

Following well known statements of the law of demand are as under:

According to Prof. Samuelson:

“The law of demand states that people will buy more at lower prices and buy less at higher prices, other things remaining the same”.

E. Miller writes:

“Other things remaining the same, the quantity demanded of a commodity will be smaller at higher market prices and larger at lower market prices”.

In simple we can say that when the price of a commodity rises, people buy less of that commodity and when the price falls, people buy more of it, ceteris paribus (other things remaining the same). Or we can say that the quantity varies inversely with its price.

There is no doubt that demand responds to price in the reverse direction but it has got no uniform relation between them. If the price of a commodity falls by 1%, it is not necessary that it may also be increase by 1%. The demand can increase by 1%, 2%, 10%, 15%, as the situation demands.

The functional relationship between demand (quantity) and the price of the commodity can be expressed in simple mathematical language as under:

Demand Function – Formula or Mathematical Expression:

Here:

Qdx = A quantity demanded of commodity x.

f = A function of independent variables contained within the parenthesis.

Px = Price of commodity x.

Po = Price of the other commodities.

T = Taste of the household.

The bar on the top of M, Po, and T means that they are kept constant. The demand function can also be expressed mathematically, as under:

Qdx = f (Px) ceteris paribus

Ceteris Paribus in Economics – Definition and Use:

In economics, the term ceteris paribus is used as a shorthand for indicating the effect of one economic variable on another, holding constant all other variables that may affect the second variable.

Schedule or Table:

The demand schedule of an individual for a commodity is a list or table of the different amounts of the commodity that are purchased from the market at different prices per unit of time. An individual demand schedule for a good say shirts is presented in the table below:

According to this demand schedule, an individual buys 5 shirts at $100 and 30 shirts at $10 in a year.

Demand Curve or Diagram:

Demand curve is a graphic representation of the demand schedule. According to Lipsey:

Demand curve, which shows the relation between price of a commodity and quantity demanded of that commodity, that consumer wishes to purchase, is called demand curve”.

Following is a graphical representation of the demand schedule.

In the figure (4.1), the quantity demanded of shirts is plotted on horizontal axis OX and price is measured on vertical axis OY. Each price-quantity combination is plotted as a point on this graph. If we join the price quantity points a, b, c, d, e and f, we get the individual demand curve for shirts. The DD/demand curve slopes downward from left to right. It has a negative slope showing that the two variables price and quantity work in opposite direction. When the price of a good rises, the quantity demanded decreases and when its price decreases, quantity demanded increases, ceteris paribus.

Assumptions:

There are three main assumptions of the law:

(i) There should not be any change in the tastes of the consumers for good (T).

(ii) The purchasing power of the typical consumer must remain constant (M).

(iii) The price of all other commodities should not vary (Po).

Example:

If there is a change, in the above and other assumptions, the law may not hold true. For example, according to the law of demand, other things being equal quantity demanded increases with a fall in price and diminishes with rise to price. Now let us suppose that price of tea comes down from $40 per pound to $20 per pound. The demand for tea may not increase, because there has taken place a change in the taste of consumers or the price of coffee has fallen down as compared to tea or the purchasing power of the consumers has decreased, etc., etc. From this we find that demand responds to price inversely only, if other thing remains constant. Otherwise, the chances are that, the quantity demanded may not increase with a fall in price or vice-versa.

Demand, thus, is a negative relationship between price and quantity.

In the words of Bilas:

“Other things being equal, the quantity demanded per unit of time will be greater, lower the price, and smaller, higher the price”.

Limitations or Exceptions:

Though as a rule when the prices of normal goods rise, their demand decreases but there may be in few cases where the law may not operate.

(i) Prestige goods: There are certain commodities like diamond, sports cars etc., which are purchased as a mark of distinction in society. If the price of these goods rise, the demand for them may increase instead of falling.

(ii) Price expectations: If people expect a further rise in the price of a particular commodity, they may buy more in spite of rise in price. The violation of the law in this case is only temporary.

(iii) Ignorance of the consumer: If the consumer is ignorant about the rise in price of goods, he may buy more at a higher price.

(iv) Giffen goods: If the prices of basic goods (potatoes, sugar, etc.,) declines, on which the poor spend a large part of their income, then poor demand for superior goods, hence when the price of Giffen good falls, its demand also falls. There is a positive price effect in case of Giffen goods.

Importance and Use:

(i) Determination of price. The study of law of demand is helpful for a trader to fix the price of a commodity. He knows how much demand will fall by increase in price to a particular level and how much it will rise by decrease in price of the commodity. The schedule of market demand can provide the information about total market demand at different prices. It helps the management in deciding whether how much increase or decrease in the price of commodity is desirable.

(ii) Importance to finance minister. The study of this law is of great advantage to the finance minister. If by raising the tax the price increases to such an extend than the demand is reduced considerably. And then it is of no use to raise the tax, because revenue will almost remain the same. The tax will be levied at a higher rate only on those goods whose demand is not likely to fall substantially with the increase in price.

(iii) Importance to the farmers. Goods or bad crop affects the economic condition of the farmers. If a goods crop fails to increase the demand, the price of the crop will fall heavily. The farmer will have no advantage of the good crop and vice-versa.

Summing up we can say that the limitations or exceptions of the law of demand stated above do not falsify the general law. It must operate.