Law of demand

Meaning of Law of Demand.
Assumption of Law of Demand
Exceptions to Law of Demand

1. Law of Demand states that other things being equal, the demand for a good extends with a fall in price and contracts with the rise in the price. It indicates the functional relationship between the price of a commodity and its quantity demanded in the market place. This law implies that demand and price are inversely related. Symbolically ,law of demand is illustrated as under Price = Demand ( when the price of a commodity increases its demand deceases ) Price = Demand ( when the price of a commodity decreases its demand increases ) In the words of Samuelson “Law of Demand states that people will buy more at lower prices and buy less at higher prices ,ceteris paribus, or other things remaining the same”. This law is also known as First Law of Purchase . LAW OF DEMAND

2. LAW OF DEMAND Law of Demand is also represented by the following equation: Dx= f(Px, Pr, Y, T, U….) Dx means demand of commodity x is a function of Price of commodity x(Px) while Price of related good (Pr), Consumers income (Y), and tastes (T) and Other determinants (U) remain constant. Law of Demand can be illustrated with the help of Demand Schedule and Demand Curve. Demand Schedule : A demand schedule is a tabular presentation of different prices of a commodity and its corresponding quantity demanded per unit of time. Demand Schedule illustrating Law of Demand Price of Notebooks Quantity Demanded 120 1 100 2 80 3 60 4 40 5 20 6

3. Demand Curve is a graphic representation of demand schedule and shows the complete relationship between quantity demanded and price . Demand Curve is a diagrammatic presentation of the relation between different quantities of a commodity demanded at different prices at a given time in the market. LAW OF DEMAND

4. ASSUMPTIONS Law of Demand is grounded on the following main assumptions: Fixed income of the consumer No change in the price of related goods Choices, tastes & preferences of consumer remains constant. No substitutes available No change in fashion There is no expectation of future price rise. No innovative or new varieties of product available.

5. Law of Demand does not apply in certain circumstances which means consumers buy more when the price of the commodity rises and buy less when the price falls and such circumstances are known as exceptions to law of demand. Following are exceptions to the Law of demand : Speculative Effect : When the price of the commodity goes up, people may buy larger quantity than before, if they anticipate or speculate a further rise in its price. Similarly , when consumers anticipate a considerable decrease in the price in future, they postpone their purchases and wait for the price to fall further, rather than buy the commodity when its price initially falls. In both the cases law of demand fails to operate. Prestigious Goods/ Veblen Effect/ Demonstration Effect/ Snob Appeal : The law does not apply to the commodities which serve as a status symbol, enhance social prestige or display wealth and richness e.g. gold, precious stones, rare paintings and antiques etc. As their prices go up and become costlier , rich people think it is more prestigious to have them and purchase more. But when their prices fall sharply, they buy less as they are no more prestigious goods. Fear of Shortage: The people may buy more of a commodity even at a higher prices when they fear of a shortage of that commodity in near future and this is contrary to law of demand. Giffen Goods : An exception of this law is also the classic case of Giffen Goods named after a British Economist Sir Robert Giffen. A fall in the price of the Giffen Goods tends to reduce its demand and rise in its price tends to extend its demand. EXCEPTIONS TO THE LAW OF DEMAND

6. Ignorance Effect : When the ignorant consumers perceive that high priced goods are always superior in quality they may purchase more in the high price situation and buy less in the low price situation. Emergency : Law of Demand also fails to operate in the emergency situations like war. EXCEPTIONS TO THE LAW OF DEMAND Pervaiz Ahmad Mir Assistant Professor GDC Kulgam 25-03-2020