Law of Demand

Law of demand states that all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa.
Here all other factors mean all the factors affecting demand.

Law of demand explains the negative relationship and negative slope of demand curve

The demand curve slopes downwards due to the following reasons

(1) Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than other substitute commodities. Thus, the quantity demanded of the commodity, whose price has fallen, rises.

(2) Income effect: With the fall in the price of a commodity, the consumer can buy more quantity of the commodity with his given income because as a result of a fall in the price of the commodity, consumer’s real income increases and so, the demand for the commodity.

(3) Number of consumers: When price of a commodity is high, only few consumers can afford to buy it, And when its price falls, more numbers of consumers would start buying it. So, the total demand increases.

(4) future expectations - When a consumer expects the prices of commodities to rise in near future, he starts making more demand and vice versa. E.g. when we expect that the prices of gas cylinder is going to rise after few days, we start making more demand at low prices.

(5)Several uses of the commodity- When the price of a commodity falls, people start demanding more to put it into different uses Eg. Milk. When the price of milk falls, we start demanding more of it so as to make butter, sweets and curd etc.

Exceptions to the law of Demand

  • Inferior goods - Demand decreases with fall in price. Eg. - Dalda ghee
  • Articles of snob appeal - Demand increases with increase in prices. Eg. - Precious paintings and Jewellery
  • Emergencies- peaople demand more even at high prices in case of emergency.
  • Quality-price relationship - Quality concious people dont buy more at less prices.
  • Conspicuous necessities - Price demand relationship is not followed in case of necessities. Demand doesnot decreases with rise in prices for necessities.
  • Ignorance - Sometimes an unaware consumer thinks that if he will pay more, he will get better.
  • Change in fashion, habits, attitudes - If a product goes out of fashion or people start disliking it. Its demand doesnt increase even with a fall in price.

**If you like it, then please leave a comment


Anonymous said...

While stating the Law of Demand, we dont use the words 'increase' or 'decrease' in demand.. Instead we use 'rise or fall' in demand or 'expansion or contraction' of demand.The simple way to define will be: "Other things being equal, when price rises, demand falls or when price falls, demand rises."Increase or decrease in demand means , demand changes not because of a change in price of the commodity but because of other factors which we have assumed to be constant.

Anonymous said...

As said in previous comment the use of term increase or decrease in demand is not appropriate here as it's used when the change in demand is due to change in factors other than price. Besides the other words mentioned you can say increase or decrease in QUANTITY DEMANDED.
Moreover the basis for Law of Demand is Law of DMU. How can you not mention it while stating the reasons for downward slope of a demand.
Also please use specific terms like veblen goods. giffen goods, conspicuous necessities, speculative goods , etc. in exceptions.
That's it. Thank you for your hard work.

Anonymous said...

This topic is useful. But I was interested to seen The Exceptions To The Law Of Demand

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Smirti Bam said...

Demand means the quantity of goods and services which consumers would buy in a market at a given time and price.