LAW OF Demand PDF

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this tells us what is demand, what is law of demand, assumptions of the law, exceptions of the law, why does the demand curve slopes downwards....

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LAW OF DEMAND

WHAT IS LAW OF DEMAND ? It is the relationship between the price of the commodity and its quantity demanded in the market. The law of demand states that the amount demanded increases with the fall in the prices and diminishes with a rise in prices. ASSUMPTIONS OF LAW OF DEMAND – 1) No change in the income of the consumer. 2) No change in the price of related goods. 3) Consumers tastes, preferences, and choice remains constant. EXPLANATION OF LAW OF DEMAND – Demand Curve – it is the curve which shows relationship between price of the commodity and the quantity demanded. It is of two types – 1) Individual demand curve 2) Market demand curve 1) Individual Demand Curve –

2) Market Demand Curve –

Price

A(Quantity Demanded)

B(Quantity Demanded)

Combined Quantity(C)

1

5

6

11

2

4

5

9

3

3

4

7

4

2

3

5

5

1

2

3

When you plot graphs between A and price, B and price, C and price, notice the changes in their demand curves.

WHY DOES THE DEMAND CURVE SLOPES DOWNWARDS ? 1) The Law Of Diminishing Marginal Utility – The price offered which the person is willing to offer for a commodity is equal to its marginal utility to him. Therefore, as the quantity offered for sale increase, its marginal utility to the buyer decreases and consequently the price which the buyer is willing to buy for its successive units goes on diminishing. 2) Income EffectA fall in the price of commodity results in a rise in the consumer’s income. He can therefore purchase more of it. On the contrary, a rise in the price of a commodity results in a fall in his real income because he has to spend more proportion of his income for that commodity. Therefore he forced to purchase less of it. 3) Substitution Effect – A rise in the price of the commodity (while the price of its substitutes remains constant ) will make it unattractive to the consumers, who will now demand less of it. They will now use other commodities (whose prices have not risen ) in the place of the commodity in question. There will be a contraction in its demand. For example- With the fall in the price of tea, the price of coffee remains same , tea will be substituted for coffee and demand for tea would go up. 4) New Buyers-

For Example – Richer people can buy commodities likes bread and butter but if the prices of these commodities like bread and butter falls , the poor people can also buy it. Here the poor people is the new buyers. 5) Different Uses – For Example - milk may be used for drinking and making curd and cheese. At it’s very high price, an individual consumer may buy only for drinking but if it’s prices are reduced, then the people will buy more milk for making curd, cheese, paneer as well. EXCEPTIONS OF THE LAW – 1) Article Of Distinction – Veblem goods are the luxury goods like jewellery. The commodities whose demand is more when their prices are high or vice versa are Veblen goods. For Example – rich peoples buy diamond not due to their needs but to display their riches to the other members of their same community.

2) Ignorance – Many times consumers consider a commodity to be of low quantity if the price is low and of high quality if the price is high. 3) Giffen Goods -

Giffen Goods are those inferior goods whose demand falls when the prices falls even when their price falls. For Example – ‘Bajra’ is an inferior goods for a consumer, as the price of ‘Bajra’ falls real income of the consumers increase or rises, with the increases income levels a consumer may demand more of wheat and thus his demand for “Bajra’ may fall. 4) Exception Of Rise Or Fall Of Prices In Future – If the prices are likely to be more in the future then even at the existing higher prices people may demand more of it in the present. If the prices are likely to fall in the future then even at the existing lower prices people may demand less units of commodity in the present, in the hope of buying more in the future....