Law of Demand

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The law of demand was developed by the famous Neo-classical economist Alfred Marshall in this book ‘Principle of Economics’ in 1890 AD.

According to this law other things reaming the same/ceteris paribus there is an inverse relationship between the price of a commodity and quantity demand for the commodity. It means when the price of commodity increases, the demand for commodity decreases and vice-versa. In other words, the higher the price the lower will be the quantity demanded of a commodity and vice versa. This law shows the direction of change in quantity demanded due to a change in the price of the commodity. It simply tells us that consumers purchase more of a commodity at a low price rather than at a high price.

Other things remaining the same, the amount demanded increases with a fall in price and diminishes with a rise in price”. – A. Marshall

Law of Demand states that people will buy more at lower prices and buy less at higher prices if other things remaining the same.“- Prof. Samuelson.

Assumptions of Law of Demand

The law is based on flowing assumptions;

  • There is no change in the tastes and preferences of the consumer,
  • The income of the consumer remains constant,
  • There should not be any substitutes of the commodity,
  • No any change in the prices of other products,
  • There should not be any change in the quality of the product,
  • No expectations of change in the future price of the commodity.
  • No change in population etc.

Demand Schedule

A demand schedule is a table that shows various quantities of a commodity demanded at different prices in a given time. A hypothetical demand schedule is shown as;

Price (in Rs.)Quantity Demanded (in Units)
225
420
615
810
105
Demand Schedule

The above table shows an inverse relationship between price and quantity demanded of a commodity. When the price is Rs. 10 the resulting demand is 5 units. If the price decreases from Rs. 10 to Rs. 8 the quantity demand will increase by 5 units from 5 to 10 units. Similarly, when the price decreases to Rs. 2 the quantity demand will increase to 25 units.    

Demand Curve

The demand curve is defined as the graphical illustration of the demand schedule. Thus the demand curve shows the inverse relationship between the price of the commodity and the quantity demand of that commodity. Thus, it is downward sloping from left to right. The demand curve is shown below;

Demand Curve
Demand Curve

In the figure, the quantity demanded and price of a commodity is measured on X-axis and Y-axis respectively. The downward-sloping curve indicates an inverse relationship between the price of the commodity and quantity demand of that commodity.

Reasons behind Downward Sloping Demand Curve

OR

Why does the demand increase/decrease with fall/rise in the price of the commodity?

The demand curve exhibits the inverse relationship between price and quantity demand while assuming other factors affecting the demand are the same. Due to such an inverse relationship between price and quantity demand, the demand curve is sloping downward from left to the right. The major reasons behind such are blow;

Law of Diminishing Marginal Utility

The law of diminishing marginal utility tells us that if we have more of a thing, there is less satisfaction or utility and if we have less of a thing, there is more satisfaction or utility. Thus, due to the operation of the law of diminishing marginal utility on the consumption process, consumers will only buy additional units if the price is reduced. So the decrease in price motivates buyers to purchase more.

Income Effect

It is the effect on the demand for goods due to a change in the real income of consumers as a result of the change in the price of the commodity. Income effect simply indicates that at a lower price one can afford more of the goods without giving up any alternative goods. It means a decline in the price of the product will increase the purchasing power of one’s money income and hence the consumer can buy more of the commodity than before. An increase in price will have the opposite effect on demand for the commodity.

Suppose a consumer has an income of Rs. 30 which is fixed. If he is ready to spend his entire income on consumption of X goods, then,

At Px=Rs. 2 Qx=15 units

At Px=Rs. 1 Qx=30 units

At Px=Rs. 3 Qx=10 units

Thus, the demand for X good rises with the fall in price and falls with the rise in price. Hence, this effect makes consumers able and willing to buy more products at a lower price than at a higher price.  

Substitution Effect

It is the effect related to the purchase of a cheaper commodity in place of a dearer one due to a change in price. This effect suggests that, at a lower price, one has the incentive to substitute the cheaper goods which are now relatively inexpensive for costlier ones. Consumers are likely to substitute inexpensive products for dear/expensive products. For example, a decline in the price of Wai Wai (Noodle brand) will increase the purchasing power of consumers, making them able to buy more of Wai Wai. At a lower price, Wai Wai is relatively more attractive and it is a substitute for Mayos, Rum Pum, Rara, and 2 pm (Noodle brands). Hence this effect makes consumers able and willing to buy more of a product at a lower price and vice versa.

Multiple Uses

Some products can be put into several uses. When the price of a commodity increases, the consumers reduce the use of this commodity. Hence, the purchase is reduced. For example, electricity could be used for lighting, cooking, heating rooms, operating TV and so on. When the price of electricity increases its consumption may be confined only up to lighting and operating TV. As a result, the total electricity demand will decrease.     

The Entry of New Consumers

If the price of a commodity decreases in the market, new consumers will attract to purchase.  Old consumers also purchase more units of the same commodity. And the demand curve for goods becomes downward sloping.

Conclusion

The law of demand is a fundamental concept in economic analysis. It represents the working of the economy and the behavior of the consumers in the free market economic setup. It is helpful to understand the response of buyers to a change in prices in the market. This law states the relationship between the price of a commodity and its resulting demand in a particular market. The Law of demand is the most common and fundamental law study in economics.

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