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Law of Demand
Law of demand was propounded by Prof. Marshall. It explains and analysis the quantities relationship between price and quantity demanded of a commodity. This law is based on common sense and experience of human beings that quantity demanded is increased with the fall in price of a commodity and vice-versa, other things remaining same. This tendency of human being to increase the demand with the fall in price and vice versa is known as law of demand. This shows the inverse relationship between the price and quantity of a commodity. Thus, the law of demand describes the inverse relationship between price and quantity demanded.
According to Marshall,-“Other things remaining the same, the amount demanded increases with a fall in price and diminishes with a rise in price.”
In the words of Benham,-” Any rise in price will reduce the volume of sale and any fall in price will expand the volume of sale to great or less extent.”
This law explains the direction of relationship of price and quantity demanded. But it does not explain the degree of variation. This law has following fundamental elements or characteristics.
1. This law is based on ceteris paribus (other things remaining constant) assumption. Thus, other factors affecting demand are assumed to be constant except the price.
2. It describes the effect of price on quantity of a commodity.
3. It shows the direction of change of price and quantity demanded but does not explain the extent of charge.
The law of demand is based on diminishing marginal utility, i.e., the utility of additional unit decreases with every increase in consumption units.
The law of demand is illustrated through a demand schedule.
Table-1.1 Demand sechedule
|Price (in Rs)||Quantity demanded|
In table 1.1 various prices of the commodity and quantity demanded in each price are shown. When price of commodity is Rs. 1 per unit quantity demanded is 12 units. When price increases and become Rs. 2 per unit, the demand decreases to 10 units. When the price of the commodity become Rs 3, the demand becomes 8 units. Similarly, at the price of Rs 4 and Rs 5, the quantity demanded shows that quantity demanded is decreased with the rise in price and vice versa.
If the combinations of price and quantity relations are plotted into the graph and they are joined continuously, demand curve is obtained.
In figure 1.1, price is presented along x-axis and quantity demanded along y-axis. When price of commodity is Rs 1 per unit, quantity demanded is 12 units. Its point of combination is given by A. When price is Rs 2 per unit quantity demanded is 10 units and its combination point is B. In the same way when the price is Rs 3, Rs 4 and Rs. 5, quantity demanded is 8,6 and 4 units respectively. The corresponding combination of these prices and quantities are C, D and E respectively. If these combinations points A,B,C and E are joined continuously, the demand curve dd is obtained.
The demand curve dd is slopping down from left to right or it has the negative slope. It shows the opposite relationship between the price and quantity demanded. Hence, demand decreases with the increases in price and vice-versa.
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Assumption of the Law of Demand
The conditions in which the law of demand is applicable are known as assumption of the law of demand. This law is applicable only if other things affecting demand remain constant. Thus, the following factors affecting demand should remain constant in the assumptions of this law.
1. Income of the consumer should remain constant.
2. Price of related goods should remain constant.
3. Interest fashion and habit of the consumer should remain constant.
4. Income distribution pattern in the society should remain constant.
5. Number of substitutes of all goods should constant.
6. The commodity should not be inferior or luxurious.
7. Population should remain constant.
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Causes of Application of the Law of Demand
Generally, quantity demanded of a commodity will increases with a fall in price and decrease with a rise in price. This relationship between the price and quantity demanded is known as the law of demand. The law of demand explains the negative relationship between the price and quantity demanded or the negatively slopping nature of demand curve. The reasons of increasing demand with the fall in price and vice-versa are as follows.
1. Law of diminishing marginal utility:- Consumers want to purchase the goods by looking marginal utility of the commodities. They want to equalize the marginal utility of commodity with the price paid for the commodity goes on decreasing when more units of goods are purchased. Hence, the consumers want to pay less for additional units of goods and demand increase when the price falls.
2. Income effect:- Purchasing power or the real income of the consumers increases with the fall in price. This enable the consumers to buy more with the same money income. Hence, demand increases with a fall in price and rises with the rise in price of the commodity.
3. Change in the number of the consumers:- When the price of a commodity falls, new consumers of lower income group are included in the purchase of goods. Thus, quantity demanded will increases with fall in the price of a commodity. Reverse will be the effect on demand when the price of a commodity.
4. Alternative uses of goods:- Some goods can be used for various purposes. When the price of such goods decreases, they will be used in all sectors of possible uses. But they will be used in some important sectors when their price rises. Hence, the quantity demanded will increases with fall in price and decreases with the rise in price.
5. Substitution effect:- If a commodity can be substituted with other commodity, then the consumers of other substitutes will buy that commodity whose price is fallen. So, the quantity demanded will increases with the fall in price. On the contrary, the consumers of a commodity will shift in other goods by leaving the goods whose price rises. As a result, the demand increases with the fall in price and vice-versa.
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