Law of
demand states that all other factors being equal, as the price of a good or
service increases, consumer demand for the good or service will decrease and
vice versa.
Here all other factors
mean all the factors affecting demand.
Law of demand explains
the negative relationship and negative slope of demand curve
The demand curve slopes
downwards due to the following reasons
(1) Substitution effect:
When the price of a commodity falls, it becomes relatively cheaper than other
substitute commodities. Thus, the quantity demanded of the commodity, whose
price has fallen, rises.
(2) Income effect: With the
fall in the price of a commodity, the consumer can buy more quantity of the
commodity with his given income because as a result of a fall in the price of
the commodity, consumer’s real income increases and so, the demand for the
commodity.
(3) Number of consumers:
When price of a commodity is high, only few consumers can afford to buy it, And
when its price falls, more numbers of consumers would start buying it. So, the
total demand increases.
(4) future expectations -
When a consumer expects the prices of commodities to rise in near future, he
starts making more demand and vice versa. E.g. when we expect that the prices
of gas cylinder is going to rise after few days, we start making more demand at
low prices.
(5)Several uses of the
commodity- When the price of a commodity falls, people start demanding more to
put it into different uses Eg. Milk. When the price of milk falls, we start
demanding more of it so as to make butter, sweets and curd etc.
Exceptions to the law of
Demand
- Inferior goods -
Demand decreases with fall in price. Eg. - Dalda ghee
- Articles of snob
appeal - Demand increases with increase in prices. Eg. - Precious
paintings and Jewellery
- Emergencies-
peaople demand more even at high prices in case of emergency.
- Quality-price
relationship - Quality concious people dont buy more at less prices.
- Conspicuous
necessities - Price demand relationship is not followed in case of
necessities. Demand doesnot decreases with rise in prices for necessities.
- Ignorance -
Sometimes an unaware consumer thinks that if he will pay more, he will get
better.
- Change in
fashion, habits, attitudes - If a product goes out of fashion or people
start disliking it. Its demand doesnt increase even with a fall in price.
