The Law of Demand

                                                          THE  LAW  OF  DEMAND

The law of demand states that the demand for a commodity increases when its price decreases and it falls when its price rises, other things remaining constant. This is an empirical law, i.e., this law is based on observed facts and can be verified with new empirical data. As the law reveals, there is an inverse relationship between the price and quantity demanded. The law holds under the condition that “other things remain constant”.

 “Other things” include other determinants of demand, viz., consumers’ income, price of the substitutes and complements, taste and preferences of the consumer, etc. These factors remain constant only in the short run. In the long run they tend to change. The law of demand, therefore, hold only in the short run.

The law of demand can be presented through a demand schedule. Demand Schedule is a series of prices placed in descending (or ascending) order and the corresponding quantities which consumers would like to buy per unit of time. A hypothetical demand schedule for a commodity, tea, is given in the following table:

                                                                        Table:1

Price per cup of tea ( Rs)	No. of cups of tea demanded
1	7
2	6
3	5
4	4
5	3
6	2
7	1

Table 1  presents seven alternative prices of tea and the corresponding quantities (number of cups of tea) demanded per day. At each price, a unique quantity is demanded. As the table shows, as price of tea per cup decreases, daily demand for tea increases. This relationship between, quantity demanded of a product and its price is the basis of the law of demand.

Reasons of the Law of Demand

1.       Substitution Effect:When price of a commodity falls, prices of all other related goods (particularly of substitutes) remaining constant,  the commodity whose price has fallen becomes relatively cheaper. Since utility maximising consumers substitute cheaper goods for costlier ones, demand for the cheaper commodity increases. The increase in demand on account of this factor is known a substitution effect.

2.       Income Effect: As a result of fall in the price of a commodity, the real income of the consumer increases. Consequently, his purchasing power increases which encourages the consumer to demand more of goods and services. The increase in demand on account of increase in real income is known as income effect.

3.       Utility-Maximising Behavior: The utility-maximising behavior of the consumer under the condition of diminishing marginal utility is also responsible for increase in demand for a commodity when its price falls.

Exceptions to the Law of Demand

The law of demand does not apply to the following cases.

(a) Expectations regarding further prices. When consumers expect a continuous increase in the price of a durable commodity, they buy more of it despite increase in its price with a view to avoiding the pinch of a much higher price in future.

(b) Status Goods. The law does not apply to the commodities which are used as a status symbol’ of enhancing social prestige or for displaying wealth and riches, e.g., gold,’ precious stones, rare paintings, antiques, etc.

(c) Giffen Goods. Another exception to the law of demand is the classic case of Giffen goods. If price of such goods increases , its demand increases instead of decreasing because, in case of a Giffen  good, income effect of a price rise is greater than its, substitution effect.