Law of demand

In economics, the law of demand is an economic law that states that consumers buy more of a good when its price decreases and less when its price increases. Ceteris Paribus.
The greater the amount to be sold, the smaller the price at which it is offered must be in order for it to find purchasers.
Law of demand states that the amount demanded of a commodity and its price are inversely related, other things remaining constant. That is, if the income of the consumer, prices of the related goods, and tastes and preferences of the consumer remain unchanged, the consumer’s demand for the good will move opposite to the movement in the price of the good.
"If the price of the good increases, the quantity demanded decreases, while if price of the good decreases, its quantity demanded increases."

Mathematical expression

The negative relation (i.e., higher price attracts lower demand & lower prices encourages high quantity to be bought by the consumers) is based on logic and experience. Mathematically, the inverse relation may be stated with causal relation as.

               Qx = f (Px)

Where, Q is the quantity demanded of x goods
f is the function, and
Px is the price of x goods.
Hence, in the above model, the function (f) is a varying one i.e., the law of demand postulates Px as the casual factor and Qx is the dependent variable.
The two variables move in the opposite direction. When Px falls Qx rises and the reverse. However, the inverse relation merely indicates and not a quantitative assertion. To put it in other words, when Px decreases, demand rises. How much demand will rise? The law is silent. For e.g., when Px falls from Rs.8/- to Rs.6/- Qx may rise from 10 to 11 or etc. thus the law of demand merely states the direction in which quantity demanded changes for a given change in price. Moreover, what the law states is hypothetical and not actual. At a particular time, instantly and continuously, if price goes on falling, demand will go on expanding.

Assumptions

Every law will have limitation or exceptions. While expressing the law of demand, the assumptions that other conditions of demand were unchanged. If remain constant, the inverse relation may not hold well. In other words, it is assume that the income and tastes of consumers and the prices of other commodities are constant. 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 the 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.

Giffen Goods

As mentioned earlier, if there is an inferior good in which the case positive income effect is greater than the negative substitution effect, the law of demand wouldn’t hold. For example, when price of potatoes (which is the main food of poor family) decreases significantly, then this household may like to buy superior goods out of the savings which he can have now due to the superior goods out of the savings which he can have now due to the superior goods like cereals, fruits etc., not only from these savings but also by reducing the consumption of potatoes. Thus, decrease in price of potatoes results in decrease in consumption of potatoes. Such basic good items (like bajra, barlery, grain etc.) consumed in bulk by the poor families, generally fall in the category of Giffen goods.

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, more will be their value as a status symbol and hence, greater will be their demand. The amount demanded of these commodities increase with an increase in their price and decrease with a decrease in their price.

Expectation of change in the price of commodity

If a household expects the price of a commodity to increase, it may start purchasing greater amount of the commodity even at the presently increased price. Similarly, if the house hold expects the price of the commodity to decrease, it may postpone its purchases. Thus, law of demand is violated in such cases.
In the above circumstances, the demand curve does not slope down from left to right instead it presents a backward sloping from top right to down left as shown in diagram. This curve is known as exceptional demand curve.

Limitation

• Change in taste or fashion.
• Change in income
• Change in other prices.
• Discovery of substitution.
• Anticipatary change in prices.
• Rare or distinction goods.

There are certain goods which do not follow this law. These include Veblen and Giffen goods

See also

• Supply and Demand

law of demand states that other factors remaining constant more of goods will be purchased only at lesser price. these other factors may include taste and preference of consumers,price of substitute and related goods,income,etc.