Law Of Demand

Law of demand shows the relationship between the price and quantity demanded of a commodity in the market. In the words of Marshall, “the amount demanded increases with a fall in price and diminishes with a rise in price.”

The law of demand states that “other things remaining constant, the higher the price of the commodity, the lower is the demand, and the lower the price, the higher is the demand.” This is called ceteris paribus (Latin phrase meaning other things constant).

The law of demand may be explained with the help of the following demand schedule.

When the price falls from Rs. 6 to Rs. 5, the quantity demanded increases from 1 to 2. In the same way, as the price falls, the quantity demanded increases. On the basis of the demand schedule, we can draw the demand curve. The above demand curve shows the inverse relationship between the price and quantity demanded of apples. It is downward sloping.

Assumptions: The law of demand is based on certain assumptions:

There is no change in consumers’ taste and preferences.
Income should remain constant.
Prices of other goods should not change.
There should be no substitute for the commodity.
The commodity should not confer any distinction.
The demand for the commodity should be continuous.
People should not expect any change in the price of the commodity.

Exceptions to the Law of Demand

According to the law of demand, other things being constant, as the price increases, the demand for the commodity decreases and vice-versa. But this is not true all the time. In some cases, as the price increases, the demand for the commodity will also increase, and the demand decreases when the price decreases. All these cases are considered exceptions to the law of demand.

When the price increases from OP to OP₁, the quantity demanded also increases from OQ to OQ₁ and vice versa. The following are the exceptions to the law of demand:

Giffen goods or Giffen paradox:
The Giffen good or inferior good or cheap good is an exception to the law of demand. The demand for these goods varies directly with the variations in prices, i.e., there exists a direct relation between the quantity demanded and the price of the commodity. Giffen goods may or may not exist in the real world. Giffen goods are named after Sir Robert Giffen. He conducted a survey on American laboring families who consume bread and meat. The survey revealed that they spend more of their income on bread because it is their staple food or main food and less of their income on meat. When the price of bread increases, after purchasing bread, they don’t have surplus money to buy meat. So, the rise in the price of bread forced the people to buy more bread by reducing the consumption of meat and thus raised the demand for bread. Goods like bajra, barley, gram, millets, and vegetables fall under the category of Giffen goods.
Goods of status:
In some situations, certain commodities are demanded just because they are expensive or prestige goods and are usually used as status symbols to display one’s wealth in society. Examples of such commodities are diamonds, air-conditioned cars, duplex houses, etc. As the price of these commodities increases, they are more considered status symbols, and hence their demand gets raised. This goes against the law of demand.
Ignorance:
Sometimes, the quality of the commodity is judged by its price. Consumers think that the product is superior if the price is high. As such, they buy more at a higher price.
Consumer expectations of future prices:
If the price of the commodity is increasing, consumers will buy more of it because of the fear that it will increase still further. Similarly, if the consumer expects the future prices to decrease, he may not purchase the commodity thinking that the good may be of bad quality. This violates the law of demand.
Fear of shortage:
During times of emergency or war, people may expect a shortage of a commodity. At that time, they may buy more at a higher price to keep stocks for the future.
Necessaries:
In the case of necessaries like rice, vegetables, etc., people buy more even at a higher price.