The law of demand meaning, concept and, assumptions

The very concept of microeconomics is based on the law of demand. It was propounded by Alfred Marshall who explained the relationship between the price and quantity demanded. This law says that more of a commodity is demanded at a lower price and vice versa. In fact, demand is the base on which all the other micro or macroeconomics theories are based. Therefore, Before discussing in detail the law of demand let’s know what is demand?

What is demand?

Although, Dictionary’s meaning of demand is quite simple” want/ desire for a certain product or service”. However, in economics it is different. Actually, demand in this context means you want a good and you have the ability to get it or purchase it. So, Just only the ability to pay and no desire for a product is not called demand. Or, you desire the product but you are not capable of buying the things also not called demand. In fact, in economics, there are different types of demand and it is made of basically three things

  1. You desire something
  2. You are willing to pay for it
  3. You have to ability to purchase it.
Demand conditions
Three basic conditions for Demand

The law of Demand

This law of demand states that keeping the other things constant the quantity demanded of a commodity shall increase with a decline in its price and vice versa. Consequently, the price of a commodity and it quantity demanded have an inverse relationship. Basically, under the law of demand in economics, we study the relationship between the price and quantity of a commodity. So, to keep it simple other things are assumed to be constant. Otherwise, it may make comprehension difficult due to the involvement of so many factors.

Assumptions of the law of demand

in economics, each law has some underlying assumptions. These help to establish the validity of the law easily and without any complication to readers. The 5 common assumptions of the law are as follows

Assumptions of the law of demand
5 Assumption of the law of demand

No change in preference, income, and taste of customers

The law of demands in economics assumes that there shall not be any change in Inhabit, fashion, taste, and preference of customers. For example, if the income of an individual rises he may still be able to purchase the commodity even at a higher price. So, the law assumes price is the only thing which affects its quantity of a commodity demanded.

No change in the price of substitute goods

Substitute goods mean those goods which can be replaced for each other. obviously, the world is full of substitutes or competitors’ goods. due to the fact of a complete replacement, substitute goods affect the demand of each other. Hence, a fall in price of one such good will result in increasing the demand for others. Therefore, this law assumes there is no change in price of substiutes at all.

To exemplify, if the price of coffee increases people will start using more of tea.

Veblen goods

This law does not apply to articles of distinction that are more in demand when they are high in price. Diamonds are a common example. When their price surges they are demanded more by rich people. It happens because rich people find utility when the price is high and it becomes a symbol of status. Primly, diamonds are demanded due to their value higher price compels the rich to buy more.

Future knowledge

The law assumes that customers are not aware of the future rise or decline of the price of a commodity. Because, if they know that particular item rate will fall. They will stop demanding in present with the expectation to buy in the future when prices will below. So, This also invalidates the working of demand law.

Complementary goods

The law of demand fails in the case of complementary goods. Because the price of one good affects the demand of others. Complementary goods are used together for their work. Car and petrol or bread and butter are common examples.

For example, the rise in the price of petrol would cause the demand for petrol cars to fall. Whereas, the law assumes the price of its own commodity affects its quantity demanded.

Individual demand function

Basically, the individual demand function shows the relationship between the demand of a person and all the factors affecting it. In reality, individual demand is affected by the price of the commodity and related goods, income, taste, and expectations, and advertisement. Thus, when all the factors are represented in-demand function we call it the individual demand function. The mathematical expression of individual demand is as below.

The law of demand( individual demand function)
Individual demand function

Market demand function

To clarify, the market demand function shows the total demand of the market and the factors affecting it. In addition to individual demand factors, there are other variables that affect market demand. These include population, income distribution, or market conditions, in addition to individual factors.

Market demand function
Market demand fucntion

Individual demand schedule and demand curve:

Actually, the demand schedule and demand curve are the ways through which we can show and understand at what price how much quantity will be demanded by an individual. A demand schedule is a table whereas a demand curve is a graphical representation.

Individual demand schedule

The law of demand schedule
individual demand schedule

The above table is a demand schedule that shows various prices and their respective demanded quantities. , it clearly depicts the negative relationship between price and quantity. As, when the price was lowest at $1 the demand was of 5 units. however, as the prices started increasing and reached $5, the quantity came down to 1 unit only. Therefore, As the price increases, consumer shows less willingness to a commodity and vice versa.

Individual demand curve

individual demand curve
Individual demand curve

The above chart shows the inverse relationship between the price and quantity which are represented on the X and Y-axis respectively. when the price was $1, consumer demand was 5 units. As the price started increasing the accompanying quantity demanded start falling. finally, when the price was $5, the quantity reduced to 1 unit only. Moreover, this clearly depicts the inverse relationship, note that DD is the demand curve that slopes downwards.

Market demand schedule and curve

The market is made of many participants. So, market demand means demand shown by all the people in the market. we aggregate the individual consumer demands and show them in tables and charts. These two are called market demand schedule and market demand curve respectively.

Market demand schedule

Market schedule
Market demand schedule

The table represents data of two individuals ‘A’ and ‘B’ with their quantity demanded. To keep it simple to understand, let’s assume that there are two participants in the market. along with the decrease in price quantity demanded is increasing for both the individuals. In fact, market demand is the combination of the demand by ‘A’ and ‘B’. When the price was $5 total market demand was 4 units, however when it came down to $1 quantity demanded rose to 16 units.

Market demand curve

Market curve
Market demand curve

Likewise, the demand schedule lets us try to understand this chart. A part shows the demand of Consumer ‘A’. when the price was at $4 he purchased 4 units. while as the price rose to $8 he starts purchasing 2 units. on the other hand, customer ‘B’ was buying 5 units at a $4 rate and he also contracted his demand. At price 8 he started buying only 3 units. Initially, market demand was 9 units(4+5 by ‘A’ and ‘B’ respectively) at a $4 price. Because price increased and both customers contracted their demand. consequently, Total market demand also fell. In fact, the market demand curve is the horizontal summation of individual curves.

Why does the demand curve slope downwards?

So far, we know that price and quantity demanded are inversely related. As the price rise, demand contracts. But why does it occur? This is the result of income and substitution effects. We check these two in details

Income effect

To illustrate, a person’s daily wage is $10 with this income he can buy 2 apples at the price of $5 each. What if the price of the apple falls to $2 each. Now, the person’s real income increases and he can buy more. With a fall in prices real income increases. Finally, subsequent to a price fall, a person can demand more of a good. But, remember in this example monetary wage is assumed to be constant. Hence, It is the real wage or income that increased. As a result, the demand curve slopes downwards.

Substitution effect

Another thing that affects the slope of demand is the substitution effect. Because, When the price of the substitute falls, the original good becomes dearer and so its demand falls. Now, customers will start substituting the goods. So, quantity demanded goods with low price will increase. A customer will buy only when its substitute prices are high as it gives him the opportunity. Opportunity to have likewise good at a reduced price so he demands more for it

Exceptions to the law of demand

In the field of economics, a law generally prevails or holds valid subject to certain assumptions. Therefore, the working of any law will fail if such certain things not kept constant. Hence, this law is also subject to certain assumptions. In the presence of such cases, it does not work at all

Veblen goods

Veblen goods are also called the article of distinction. In the real world, there are many things that attract more customers when their price increases. One of the most common examples is diamonds. Because these gems are precious their marginal utility is more. Diamond and gem reflect the social status of their owner. So, rich people naturally demand more of such items when they are at a high rate. These are named after the American economist “Thorstein Veblen”.

Giffen paradox

The Giffen paradox is yet another example where the application of law becomes ineffective. In reality, there are some commodities that have cheaper prices. However, they are a necessity to people. As a result, if the price of such items is increased still people don’t contract their demand. Giffen goods got their name after “Sir Robert Giffen“.
For example, assume you eat two items bread and meat. Meat is a luxury and you have to spend more on it than on bread. Now, if the price of bread is increased, your marginal utility for money will also increase. Even though bread is dearer now you will start purchasing more bread and give up on meat. The more purchase on bread is to compensate for the meat.

Income effect

Finally, with the rise in income, you will demand more of a commodity. Even though, its price has been increased. This is another phenomenon where this law does not work. In case, your income increases more than the proportionate change in prices. You may still be able to buy more goods at a higher price.

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