Law of Demand
Among the many causal factors affecting demand, price is the most
significant and the price- quantity relationship called as the Law of Demand is
stated as follows: "The greater the amount to be sold, the smaller must be
the price at which it is offered in order that it may find purchasers, or in
other words, the amount demanded increases with a fall in price and diminishes
with a rise in price" (Alfred Marshall).
In simple words other things being equal, quantity demanded will
be more at a lower price than at higher price. The law assumes that income,
taste, fashion, prices of related goods, etc. remain the same in a given
period. The law indicates the inverse relation between the price of a commodity
and its quantity demanded in the market. However, it should be remembered that
the law is only an indicative and not a quantitative statement. This means that
it is not necessary that such variation in demand be proportionate to the
change in price.
Assumptions
to law of demand
The statement of the law of demand,
demonstrates that that this law operates only when all other things remain
constant. These are then the assumptions of the law of demand. We can state the
assumptions of the law of demand as follows:
1. Income level should remain
constant: The law of demand operates only when the
income level of the buyer remains constant. If the income rises while the price
of the commodity does not fall, it is quite likely that the demand may
increase.
2. Tastes of the buyer should not
alter: It often
happens that when tastes or fashions change people revise their preferences. As
a consequence, the demand for the commodity which goes down the preference
scale of the consumers declines even though its price does not change.
3. Prices of other goods should
remain constant: Changes in the prices of other goods often affect the demand for
a particular commodity. Therefore, for the law of demand to operate it is
imperative that prices of other goods do not change.
4. No new substitutes for the
commodity: If some
new substitutes for a commodity appear in the market, its demand generally
declines. This is quite natural, because with the availability of new
substitutes some buyers will be attracted towards new products and the demand
for the older product will fall even though price remains unchanged. Hence, the
law of demand operates only when the market for a commodity is not threatened
by new substitutes.
5. Price rise in future should
not be expected: If the buyers of a commodity expect that its price will rise in
future they raise its demand in response to an initial price rise which
violates the law of demand. Therefore, it is necessary that there must not be
any expectations of price rise in the future.
6. Advertising expenditure should
remain the same If the advertising expenditure of a firm increases, the consumers
may be tempted to buy more of its product. Therefore, the advertising
expenditure on the good under consideration is taken to be constant.
Exceptions of the 'Law of Demand'
The law of demand does not apply in every
case and situation. The circumstances when the law of demand becomes
ineffective are known as exceptions of the law. Some of these important
exceptions are as under.
1. Giffen goods: Some special varieties of
inferior goods are termed as Giffen goods. Cheaper varieties of this category
like bajra, cheaper vegetable like potato come under this category. Giffens’s
Paradox describes a peculiar experience in case of such inferior goods. When
the price of an inferior commodity declines, the consumer, instead of
purchasing more, buys less of that commodity and switches on to a superior
commodity.
2. Conspicuous Consumption: Conspicuous
Consumption refers to the consumption of those commodities which are bought as
a matter of prestige. Naturally with a fall in the price of such goods, there
is no distinction in buying the same. As a result the demand declines with a
fall in the price of such prestige goods. Gold, Diamond etc are the examples of
such commodities.
3. Conspicuous necessities: Certain things become the
necessities of modern life. So we have to purchase them despite their high
price. The demand for T.V. sets, automobiles and refrigerators etc. has not
gone down in spite of the increase in their price. So they are purchased
despite their rising price.
4. Ignorance: A consumer’s ignorance is
another factor that at times induces him to purchase more of the commodity at a
higher price. This is especially so when the consumer is haunted by the phobia
that a high-priced commodity is better in quality than a low-priced one.
5. Emergencies: Emergencies like war, famine
etc. negate the operation of the law of demand. At such times, households
behave in an abnormal way. Households accentuate scarcities and induce further
price rises by making increased purchases even at higher prices during such
periods. During depression, on the other hand, no fall in price is a sufficient
inducement for consumers to demand more.
6. Future changes in prices: Households also act speculators.
When the prices are rising households tend to purchase large quantities of the
commodity out of the apprehension that prices may still go up. When prices are
expected to fall further, they wait to buy goods in future at still lower
prices.
7. Change in fashion: A change in fashion and tastes
affects the market for a commodity. When a broad toe shoe replaces a narrow
toe, no amount of reduction in the price of the latter is sufficient to clear
the stocks.
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