The document discusses the law of demand, which states that as the price of a commodity increases, the quantity demanded decreases, assuming other factors remain constant. It defines demand and explains demand schedules and curves, which show the inverse relationship between price and quantity demanded. The law of demand operates due to factors like diminishing marginal utility and substitution effects. Exceptions include Giffen goods and goods with inelastic demand. Factors like income, prices of substitutes and complements, and tastes can also impact the law of demand.
2. Demand
Precisely stated, the word demand for a commodity is the quantity of it which
consumers wish and are able to buy at a given price in a given period.
Thus, demand in economics implies two things:
(i) The desire to purchase
(ii) The ability to pay for good
3. Law of Demand
The law of demand states that there is an inverse relationship between price
of a commodity and its quantity demanded. Other things assumed to be
constant are prices of related commodities, income of the consumer, tastes
and preferences of the consumer and various other factors, which affect
demand. If there is any change in these factors, then the law may not hold
true.
To illustrate the relationship between the quantity of a commodity demanded
and it price, demand schedule and demand curve.
4. Demand Schedule
The demand schedule shows the various quantities of commodity demanded
at various prices.
In the table below a hypothetical demand schedule is given. It shows the
various quantities of chocolate that would be demanded at various price level
by a household.
Prices of Chocolate Quantity Demanded
20 10
15 12
10 14
05 16
5. Demand Curve
The demand curve shows the same information as the demand schedule. The
curve shows the number of commodity demanded at each price . This curve id
downward sloping showing an inverse relationship between quantity
demanded of the commodity and price of the commodity.
The downward sloping demand curve is in accordance with the law of demand
which states an inverse relationship between price and quantity demanded of
a commodity. Of course, other factors that affect demand are considered to
be constant.
6. Assumptions of the Law of Demand
Consumer’s Money Income should be constant
Price of commodity is constant
Prices of substitute goods should be constant
Prices of complementary goods should be constant
Psychological factors like habits, taste, preference of consumer are constant
State of wealth of consumer
Sociological factor like fashion etc should be constant
7. Reasons for the Law of Demand Operate
Traditional Approach:
The law of diminishing marginal utility
Change in the number of consumers
Various uses of a commodity
Size of consumer group
Various uses of commodity
Modern Approach:
Income effect
Substitution effect
8. Exception to the Law of Demand
Giffen goods
Conspicuous goods
Future expectation about prices
Commodities with special brand and trade mark
Small part of total expenditure
Goods having perfectly inelastic demand
9. Factors Affecting Law of Demand
Price of the commodity
Income of the consumers
Inferior goods
Necessaries
Price of the related commodities
Tastes of the household
Other factors