Suppose you want to buy mangoes at Rs.100 per dozen you buy 6 dozens. If the price of mangoes increase to 200/- then how much will you buy? Definitely less quantity of goods. What kind of relationship is there between the price and quantity demanded? There is inverse relation.
The law of demand explains the functional relationship between price of a commodity and the quantity demanded of the same. It is observed that the price and the demand are inversely related which means that the two move in the opposite direction. An increase in the price leads to a fall in the demand and vice versa.
The law of demand states that “Ceteris paribus (other things remaining the same), higher the price, lower the demand and vice versa”.
The law is stated primarily in terms of the price and quantity relationship. The quantity demanded is inversely related to its price. Here we consider only two factors i.e. price and quantity demanded. All the other factors which determine are assumed to be constant. Which are those factors?
The basic assumptions of Law of Demand are;
- Income of the consumer is constant.
- There is no change in the availability and the price of the related commodities (i.e. complimentary and substitutes)
- There are no expectations of the consumers about changes in the future price and income.
- Consumers’ taste and preferences remain the same.
- There is no change in the population and its structure.
If the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in quantity of good demanded by the consumer will be negatively correlated to the change in the price of the good or service. The change in price will be reflected as a move along the demand curve.
Demand Schedule and Demand Curve
The demand schedule is a schedule or a table which contains various possible prices of a commodity and different quantities demanded at them. It can be an individual demand schedule representing the demand of an individual consumer or can be the market demand schedule showing the total demand of all the consumers taken together, this is indicated in the following table. An example of demand schedule is given below.
|Price (in $)||Quantity demanded (in units)|
A demand curve can be obtained by plotting a demand schedule on a graph and joining the points so obtained, like the demand schedule we can derive an individual demand curve as well as a market demand curve. The former shows the demand curve of an individual buyer while the latter shows the sum total of all the individual curves i.e. a market or a total demand curve.
The demand curve is downward sloping, indicating the negative relationship between the price of a product and the quantity demanded. For normal goods, a change in price will be reflected as a move along the demand curve while a non-price change will result in a shift of the demand curve.
Characteristics of Demand Curve
So by observing a demand curve the chief characteristics are;
- Inverse relationship between the price and the quantity demanded. This is shown by the downward sloping demand curve.
- Price is an independent variable and the demand is dependent. It is the effect of price on demand and not vice versa.
Reasons underling the law of demand – this inverse relationship can be explained in terms of two reasons, viz,
- Income effect: The decline in the price of a commodity leads to an equivalent increase in the income of a consumer because he has to spend less to buy the same quantity of goods. The part of the money left can be used for buying some more units of commodity. For e.g. Suppose the price of mangoes falls from Rs.100/- per dozen to 50/- per dozen. Then with the same amount of 100/- you can buy one more dozen, i.e.,2 dozens at Rs. 50/-
- Substitution effect: When the price of a commodity falls, the consumer tends to substitute that commodity for other commodity which is relatively dearer. For e.g. Suppose the price of the Urad falls, it will be used by some people in place of other pulses. Thus the demand will increase.
Exceptions of Law of Demand
- Conspicuous Consumption: The goods which are purchased for ‘Snob appeal’ are called as the conspicuous consumption. They are also called as ‘Veblen goods’ because Veblen coined this term. For e.g.- diamonds, curios. They are the prestige goods. The would like to hold it only when they are costly and rare. So, what can be the policy implication for the manager of a company who produces it? A producer can take advantage by charging high premium prices.
- Speculative Market: in this case the higher the price the higher will be the demand. It happens because of the expectation to increase the price in the future. For e.g. shares, lotteries, gamble and ply-win type of markets.
- Giffens Goods: It is a special type of inferior goods where the increase in the price results into the increase In the quantity demanded. This happens because these goods are consumed by the poor people who would like to buy more if the price increases. For e.g. a poor person who buys inferior quality vegetables. If the price of such vegetable increase then they prefer to buy because they think that it would be of a better quality
- Ignorance: Many a times consumer judges the quality of a good from its price. Such consumers may purchase high price goods because of the feeling of possessing a better quality.
- Demand (Library of Economics and Liberty)