Meaning: -The Law of demand establishes the functional relationship between the Price of a commodity and the quantity of that commodity demanded at different prices, assuming other factors remaining constant.
When the price of a commodity rises, demand for it falls and when the price of the commodity falls, demand rises. So less quantity is demanded at higher prices and more quantity is demanded at lower prices. There exist inverse relationship between price and quantity demanded of a commodity.
Definition: -According to Marshall the law of demand, is defined as “Other things being equal, the quantity of a commodity demanded varies inversely with its price.”
Symbolically, the Law of demand can be expressed as follows:
Dx = f (Px)
Where, D = stands for the demand for commodity X
X stands for the commodity demanded
F stands for function of
Px stands for the price of the commodity X
We can explain this law with the help of a schedule and a diagram.
Price (Rs.)
|
Quantity Demanded
|
1
2
3
4
5
|
50
40
30
20
10
|
The Schedule shows that with an increase in Price the quantity demanded is decreasing. It indicates inverse relationship between the two variables price and quantity demanded. When the price is Re. 1 the consumer demand 50 units and when the price rises to Rs. 5 he demands the least that is 10 units.
In the above diagram X-axis represents quantity demanded and Y-axis represents price. Various points from the schedule are plotted on the graph, joint those points we will be getting demand curve. DD is the demand curve which slopes downward from left to right indicating inverse relationship between price and Quantity demanded. This happens when the price is more, demand is less and when price is less, and demand is more.
Exception to the law of demand
1. Giffen goods or inferior goods-Giffen Paradox: -Inferior goods are those goods whose demand does not rise even if their price falls. At times, the demand decrease, when the price of such gods falls. Sir Robert Giffen discovered this behaviour in England in relation to inferior goods such as bread. Therefore inferior goods are named after Giffen and they called ‘Giffen Goods’.
2. Prestige Goods: There are certain goods and services, which represent ‘Status’ of ‘Prestige For the people. Demand for these commodities is more when the price is more.
3. Anticipation of changes in price: -If people anticipate a further rise in price, they may buy more at the existing higher price. Likewise, if people anticipating a further fall in price, they will not buy more even at the existing lower prices. They will wait for the price to fall further.
4. Price Illusion: -There is a belief among the people that the higher is the price, the better is the product and accordingly the greater is the demand for such goods.
5. Changes in fashion: The law of demand may not work, if there is change in fashion. For example, if a product goes out of fashion and its price falls down, people will not buy more of it even at very low prices.
6. Promotional activates: - Promotional activities such as advertising and salesmanship undertaken by seller can make the people buy more even at high prices.
7. Changes in quality: if there is a change in the quality of the product, the law of demand may not apply. For instance, if there is improvement in quality of the product, some people my demand more even at higher price.
