THE LAW OF DEMAND

LAW OF DEMAND 

Statement : If the price of commodity falls ,the amount demanded goes up and vice -versa.There is an inverse  relationship between price of a commodity and amount demanded. This relationship is known as Demand.

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 ,higher the price".

According to prof. to Samuelson," Law of Demand states that people will buy more at lower prices and buy less at higher prices, other things remaining the same".

Assumptions of the Law 

a) No change in tastes and preferences of consumers.

b) Consumer's income must remain same.

c)The prices of the commodities related to commodity in demand should not change .

d)There should be no change in the wealth of consumers or their tastes.

Explanation : The relationship between the price of commodity and amount demanded is dependent on large number of factors,the most important being the nature of commodity.

Demand schedule : The response of amount demanded to changes in price of commodity is known as demand schedule. Individual demand schedule of two consumer when added gives Market demand schedule. 

price               amount           amount         total

per quintal   demanded    demanded    market

(rs).                 by buyer        by buyer      demand

                        A.                     B

   50                       5                   10                5+10=15

   40                      15                  20             15+20=35

   30                      25                  30             25+30=55

Demand curve : The demand curve shoes relation between price of commodity and amount of that commodity consumer wishes to purchase .When the points of demand schedule are located on graph ,it will gives us demand curve.

The demand curves shows movement from left down to right  and thus forms negatively sloped curve .

Reasons of Law of Demand 

a)Law of diminishing marginal utility : The diminishing marginal utility for consumer is the fundamental cause of Law of Demand. As the price of commodity falls, consumer purchases more of commodity so that his marginal utility from commodity also falls to equal the reduced price .

b)Substitution effect : When the price of commodity falls ,it becomes cheaper as compared to other commodities which consumer is purchasing . As a result consumer would like to substitute this cheaper commodity for other commodities whose prices remain the same .

For example : With the fall in price of tea,coffee's price remaining the same ,tea will be substituted for coffee.

c)Income effect :As the price of commodity is reduced ,the consumer has to spend less amount of money income dor same amount of commodity .Thus when price falls , amount demanded rises and vice -versa.

d)Different uses of commodity :Commodities have may users.If their prices rises, they are used only for more important purposes. As a result ,their demand will go down .On the contrary,when the price is reduced ,the commodity will be put to many other uses where it was not being used earlier. Its demand will go up then .

Exceptions of the law

a) Giffen goods :There are some commodities of consumption which are inferior from the consumer's viewpoint. There are others which are superior. Sir Giffen pointed out that in case of English workers the law of demand does not apply to bread. He could practically show that with a fall in price of bread it's amount demanded was reduced rather than being more than before. It is now clear that as to why English workers behaved contrary to law of demand.They had two items bread and meat. As the price of bread falls in market they could purchase same amount of bread with less money. The money income saved thereby was not spent on purchasing more bread. Rather it was spent on purchasing more of meat ,a superior commodity for English workers.In short, there was no substitution effect in favour of bread. The income effect of fall in price of bread was also in favour of meat. This reduced the demand for bread as its price went down. Therefore,bread was special type of inferior good whose amount demanded changed directly with change in its price and no inversely as expected from the law of demand.

b)Articles of distinction :According to Veblen the demand for articles of distinction like diamonds and jewellery is more when their price is high This is because  rich man's desire for distinction is satisfied better when articles of distinction are highly priced and poorer man cannot buy them. On the other hand,the demand for articles of distinction falls with fall in their price.

c)Expectation of rise and fall in price in future:There are many commodities whose prices are expected to go down or rose in future. In such cases,consumers may behave opposite to law of demand. If people expect a rise in price in future ,they will rush to purchase more of the commodity at present price.If they expect the price to fall,they will purchase less of commodity to derive benefit from the fall in price later on.

d)Ignorance on part of consumers about quality:It happens many times that consumers judge quality of commodity from its price .In such cases,a lower price commodity may be considered inferior and purchasers buy lesser amount of it. But when its price is more they consider it to be superior and may purchase more of commodity than before .

Factors affecting demand

a)Price of a commodity - The amount of commodity demanded at a particular price is more properly called price demand.The relation between price and demand is called law of demand. It is not only existing price but also expected changes in price which effect demand .

b)Income of consumer-A relation can be established between consumer income and demand at different level of income ,price and other things remaining constant. The demand for normal commodity goes up when income rises and falls down when income falls.

c)Prices of related goods-Related goods are of two types:

Substitutes which can replace each other in use,for  example : tea for coffee .The change in price of substitute has effect on commodity's demand in same direction in which price changes .The rise in price for coffee shall raise demand for tea .

complementary goods are those which are jointly demanded such as pen and ink. In such case,These have opposite relationship between price of one commodity and amount demanded for other.If the price of pens goes up ,their demand is less as result of which the demand for ink is also less .The price and demand go in opposite direction.

d)Taste of consumer-The amount demanded also depends on consumer's tastes. It includes fashion,habit,customs ,advertisements etc.If taste for commodity goes up,it's amount demanded us more even at same price. This is called as increase in demand.

e)Wealth-The wealthier are people,higher us demand for normal commodities .If wealth is more equally distributed ,the demand for necessaries and comforts is more.On the other hand, if some people are rich which majority are poor, the demand for luxuries is generally higher.

f)Population-Increase in population increases demand for necessaries of life. The composition of population means proportion of young ,old,children as well as ratio of men to women. A change in composition of population has an effect on nature of demand for different commodities.

g)Government policy -It effects the demands for commodities through taxation. Taxing a commodity means increase its price and demand goes down .Similarly,financial help from government increases demand for commodity while lowering its price .

h) Expectations regarding future-If consumers expect changes in price of a commodity in future,they will change demand at present even when present price remains same . Similarly,if consumers expect their incomes to rise in near future, they may increase demand for commodity just now .

i)Climate and weather -In cold areas,woollen clothes is demanded .During hot summer daye,ice is very much in demand ,On rainy day,ice-cream is not so much demanded.

j)State of business -The level  of demand for different commodities also depends upon the business condition in country.If country us passing through boom conditions,there will be a marked increase in demand. On the other hand,the level of demand goes down during depression .