Q. State and explain the law of demand.
The term of demand is different from desire, want, will or wish. In the language of economics, demand has different meaning. Any want or desire will not constitute demand. The term demand refers to total or given quantity of a commodity or a service that are purchased by the consumer in the market at a particular price and at a particular time.
The Law of Demand:
It explains the relationship between price and quantity demanded of a commodity. It says that demand varies inversely with the price. The law can be explained in the following manner: “Keeping other factors that affect demand constant, a fall in price of a product leads to increase in quantity demanded and a rise in price leads to decrease in quantity demanded for the product”. The law can be expressed in mathematical terms as “Demand is a decreasing function of price”. Symbolically, thus D = F (p) where, D represents Demand, P stands for Price and F denotes the Functional relationship. The law explains the cause and effect relationship between the independent variable [price] and the dependent variable [demand]. The law explains only the general tendency of consumers while buying a product. A consumer would buy more when price falls due to the following reasons:
- A product becomes cheaper.[Price effect]
- Purchasing power of a consumer would go up.[Income effect]
- Consumers can save some amount of money.
- Cheaper products are substituted for costly products [substitution effect].
Important Features of Law of Demand:
- There is an inverse relationship between price and quantity demanded.
- Price is an independent variable and demand is a dependent variable
- It is only a qualitative statement and as such it does not indicate quantitative changes in price and demand.
- Generally, the demand curve slopes downwards from left to right.
The operation of the law is conditioned by the phrase “Other things being equal”. It indicates that given certain conditions, certain results would follow. The inverse relationship between price and demand would be valid only when tastes and preferences, customs and habits of consumers, prices of related goods, and income of consumers would remain constant.
Exceptions to the Law of Demand:
Generally speaking, customers would buy more when price falls in accordance with the law of demand. Exceptions to law of demand states that with a fall in price, demand also falls and with a rise in price demand also rises. This can be represented by rising demand curve. In other words, the demand curve slopes upwards from left to right. It is known as an exceptional demand curve or unusual demand curve.