Law of Demand

 Law of demand express the relationship

between the quantity demanded and
price
 Inverse relationship between price and
Demand
 When Price increases demand decreases
 When price decreases demand Increases
Law of demand Assumptions
 There is no change in the taste and preferences
of the consumer
 The income of the consumer remains constant
 There is no change in customs
 There should not be any substitutes of the
commodity
 There should not be any change in the price of
other commodity
 There should not be any change in the
quality of the product
 Habits of the consumer remains unchanged

Given these conditions, the Law of Demand

operates. If there is change even one of
these conditions, it will stop operating,
Chief characteristics of Law of
Demand
1. Inverse relationship - the relationship between
price and quantity demand is inverse
2. Price, an independent variable, and demand, a
dependent variable
3. Other things remain the same – there should be
no change in the other factors influencing
demand except price.
4. Reason underlying the law of demand
a. Income effect
b. Substitution effect
Exception to the law of demand
 War – people may buy start buying for building
stocks even when the price rises.
 Depression – During a depression, the price of
the commodities are very low and the demand for
them is also less
 Giffen Paradox – poor people spent major part of
their income on inferior goods such as potatoes
and small part of their income on meat. If the
price rises on potatoes they reduce their
consumption on meat
 Speculation – frequently price of the
commodity increasing the producers
purchase more and speculate the
commodity. If the price of the commodity
reducing they stop purchasing more.
 Snob appeal or ostentation – the price of
luxurious goods increases the prestigious
people demanding more
Causes of downward sloping demand
curve
 The law of demand based on Law of
diminishing marginal utility – when a
consumer buys more units of a commodity
the marginal utility of that commodity
continues decline.
 Price effect – due to price effect when
consumers consume more or less of the
commodity, the demand curve slope
downwards
 Substitution effect
 Downward sloping demand curve depends
on Low income group people – low income
group is a majority
 Different uses of certain commodities and
services that are responsible for the
negative slope of the demand curve.
Example – electricity
 There is a tendency to satisfy unsatisfied
wants. Example - apple
Demand determinants – determinants
of Individual demand
 Price of the commodity
 Income of the consumer
 Taste and preference
 Price of related goods
 Advertisement and sales
 Consumers Expectation
Demand determinants – determinants
of Market demand
 Price of the product
 Standard of living and spending habits
 Distribution of income pattern
 The growth of population
 Future expectation
 Tax rate
 Inventions and Innovations
 Whether condition
 Pattern of saving
 Circulation of money
Types of demand
1. Consumer goods and producer goods –
Goods and service used for final
consumptions is called consumer goods
Goods used for final consumption
2. Perishable and durable goods
3. Autonomous Demand
4. Individual demand and market demand
4. Firm and industry demand
5. Demand by market segments and by total
market