Law of Demand
Law of demand speaks from buyer / customer point of view
Among the many causal factors affecting demand of Goods and services, its price is most significant factor and the price- quantity relationship called as the Law of Demand is stated as follows:
"The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers, or in other words, the amount demanded increases with a fall in price and diminishes with a rise in price" (Alfred Marshall).
In simple words other things being equal, quantity demanded will be more at a lower price than at higher price. The law assumes that income, taste, fashion, prices of related goods, etc. remain the same in a given period. The law indicates the inverse relation between the price of a commodity and its quantity demanded in the market. However, it should be remembered that the law is only an indicative and not a quantitative statement. This means that it is not necessary that such variation in demand be proportionate to the change in price.
Definitions
Some major definitions of the Law of Demand are as follows:
"Law of Demand states that people will buy more at lower prices and buy less at higher prices, if other things remaining the same."- Prof. Samuelson.
The Law of Demand states that amount demanded increases with a fall in price and diminishes when price increases." - Prof. Marshall
"According to the law of demand, the quantity demanded varies inversely with price." –Ferguson
Marshall:-“The greater the amount to be sold the smaller must be the price”
Benham:-“Usually a larger quantity of commodity will demanded at lower price that a higher price”
Characteristics of law of demand
There is Inverse relationship between price of commodity and its demand.
Price is independent variable
Demand is dependent variable on price of goods.
DEMAND CURVE (graphical presentation of law of demand)
The demand schedule is presented in the graphical form, wherein the quantity demanded for oranges is shown on X axis and the price of the oranges are shown on Y axis.
The demand for oranges is at 10 when the price of the orange is at 5/-, but the demand for oranges is decreased from 2 to 10 when the price of orange is increased from 5 to 10/- each. As the price of the orange is increased the demand for the oranges decreased and the price is decreased the demand for oranges increased, which is because of Law of Demand effect on goods and services, as there is inverse relation in between price of the goods and services and demand for the goods and services. The demand curve is sloping downwards from left to right.
Assumptions
Every law will have limitation or exceptions.This law operates when the commodity’s price changes and all other prices and conditions do not change. The main assumptions are
Habits, tastes and fashions remain constant
Money, income of the consumer does not change.
Prices of other goods remain constant
The commodity in question has no substitute
The commodity is a normal good and has no prestige or status value.
People do not expect changes in the prices.
Exceptions to law of demand
Generally, the amount demanded of good increases with a decrease in price of the good and vice versa. In some cases, however, this may not be true. Such situations are explained below.
1. Giffen goods: these are those inferior goods on which the consumer spends a large part of his income and the demand for which falls with a fall in their price. The demand curve for these has a positive slope. The consumers of such goods are mostly the poor. a rise in their price drains their resources and the poor have to shift their consumption from the more expensive goods to the giffen goods, while a fall in the price would spare the household some money for more expensive goods. which still remain cheaper. These goods have no closely related substitutes; hence income effect is higher than substitution effect.
2. Commodities which are used as status symbols: Some expensive commodities like diamonds, air conditioned cars, etc., are used as status symbols to display one’s wealth. The more expensive these commodities become, the higher their value as a status symbol and hence, the greater the demand for them. The amount demanded of these commodities increase with an increase in their price and decrease with a decrease in their price. Also known as a Veblen good. (In economics, Veblen goods are a group of commodities for which people's preference for buying them increases as their price increases, as greater price confers greater status, instead of decreasing according to the law of demand.)
3. Expectations regarding future prices: If the price of a commodity is rising and is expected to rise in future the demand for the commodity will increase.
4. Emergency: At times of war, famine etc. consumers have an abnormal behaviour. If they expect shortage in goods they would buy and hoard goods even at higher prices. In depression they will buy less at even low prices.
5. Quality-price relationship: some people assume that expensive goods are of a higher quality then the low priced goods. In this case more goods are demanded at higher prices.
demand.pptx