LAW OF DEMAND
The law of demand is one of the most important laws of economic theory. The law of demand
expresses a relationship between the quantity demanded and its price and this relationship is
inverse in nature. According to law of demand other things beings equal or ceteris paribus,
“A rise in the price of a commodity or service is followed by a fall in quantity demanded, and
a fall in price is followed by an increase in quantity demanded”. Thus, lower the price, the
larger is the quantity demanded of a commodity and vice-versa
Statements of Law of Demand
According to Alfred Marshall, “the amount demanded increases with a fall in price, and
diminishes/decreases with a rise in price”.
According to Robertson, “Other things being equal, the lower the price at which a thing is
offered, the more a man will be prepared to buy it.”
According to Ferguson, “Law of Demand, the quantity demanded varies inversely with
price.”
Assumptions of Law of Demand
While plotting the demand curve the following assumptions are to be taken into the
consideration:
1. Consumer’s income remains same. If the income of an individual increases, the
demand for products by him/her also increases, which is against the law of demand.
As he/she will demand the product even if its price rises due to his/her increased
income. Therefore, the income of consumer should not change.
2. Preferences, fashion and tastes of consumer remain same. If fashion changes, then
people would not purchase the products that are out of fashion even if their price falls.
They will prefer modern fashion clothes even at higher prices.
3. No change in the age structure, size, and sex ratio of population. This is because if
population size increases, then the number of buyers increases, which, in turn, affect
the demand for a product directly.
4. No anticipation of price change in future: -It is also assumed that people do not
anticipate any further change in the price in the near future. If people expect a further
rise in price, they may demand more even the existing high price. Similarly, if people
expect a further fall in price, they may not buy more even at the existing low price.
5. Government Policy remains constant:- The taxation and fiscal policy of the
government should not change. A change in income tax, for instance, may cause
changes in consumer's disposable income and hence demand. Therefore, it is assumed
that there is no change in government policy on taxation.
1
, 6. No innovation of products in the market: People will demand more for better
quality products even at higher prices (this goes against law of demand) which can
affect the demand for the existing product.
Explanation of the law
The law of demand can be explained by the Demand Schedule and the Demand Curve.
Price (In Rs.) Demand (In Kg.)
5 100
4 200
3 300
2 400
Table 5.6 shows Demand Schedule
The table 5.6 shows the demand of all the consumers in a market. When the price decreases
there is increase in demand for goods and vice versa. When price is Rs.5, demand is 100
kilograms. When the price is Rs. 4, demand is 200 kilograms. It clearly shows that as more
and more units of commodity are demanded, the price of the product falls.
Diagrammatic Explanation of Law of Demand
Figure 5.7 shows Demand Curve
As seen in figure 5.7, demand curve DD slopes downwards from left to right, indicating an
inverse relationship between price and demand.
2
The law of demand is one of the most important laws of economic theory. The law of demand
expresses a relationship between the quantity demanded and its price and this relationship is
inverse in nature. According to law of demand other things beings equal or ceteris paribus,
“A rise in the price of a commodity or service is followed by a fall in quantity demanded, and
a fall in price is followed by an increase in quantity demanded”. Thus, lower the price, the
larger is the quantity demanded of a commodity and vice-versa
Statements of Law of Demand
According to Alfred Marshall, “the amount demanded increases with a fall in price, and
diminishes/decreases with a rise in price”.
According to Robertson, “Other things being equal, the lower the price at which a thing is
offered, the more a man will be prepared to buy it.”
According to Ferguson, “Law of Demand, the quantity demanded varies inversely with
price.”
Assumptions of Law of Demand
While plotting the demand curve the following assumptions are to be taken into the
consideration:
1. Consumer’s income remains same. If the income of an individual increases, the
demand for products by him/her also increases, which is against the law of demand.
As he/she will demand the product even if its price rises due to his/her increased
income. Therefore, the income of consumer should not change.
2. Preferences, fashion and tastes of consumer remain same. If fashion changes, then
people would not purchase the products that are out of fashion even if their price falls.
They will prefer modern fashion clothes even at higher prices.
3. No change in the age structure, size, and sex ratio of population. This is because if
population size increases, then the number of buyers increases, which, in turn, affect
the demand for a product directly.
4. No anticipation of price change in future: -It is also assumed that people do not
anticipate any further change in the price in the near future. If people expect a further
rise in price, they may demand more even the existing high price. Similarly, if people
expect a further fall in price, they may not buy more even at the existing low price.
5. Government Policy remains constant:- The taxation and fiscal policy of the
government should not change. A change in income tax, for instance, may cause
changes in consumer's disposable income and hence demand. Therefore, it is assumed
that there is no change in government policy on taxation.
1
, 6. No innovation of products in the market: People will demand more for better
quality products even at higher prices (this goes against law of demand) which can
affect the demand for the existing product.
Explanation of the law
The law of demand can be explained by the Demand Schedule and the Demand Curve.
Price (In Rs.) Demand (In Kg.)
5 100
4 200
3 300
2 400
Table 5.6 shows Demand Schedule
The table 5.6 shows the demand of all the consumers in a market. When the price decreases
there is increase in demand for goods and vice versa. When price is Rs.5, demand is 100
kilograms. When the price is Rs. 4, demand is 200 kilograms. It clearly shows that as more
and more units of commodity are demanded, the price of the product falls.
Diagrammatic Explanation of Law of Demand
Figure 5.7 shows Demand Curve
As seen in figure 5.7, demand curve DD slopes downwards from left to right, indicating an
inverse relationship between price and demand.
2
