THE LAW OF DEMAND WITH ASSUMPTIONS AND EXCEPTIONS

Описание: Law of Demand :
Introduction :
The law of demand was introduced by
Prof. Alfred Marshall in his book, ‘Principles of
Economics’, which was published in 1890. The
law explains the functional relationship between
price and quantity demanded.
Statement of the Law :
According to Prof. Alfred Marshall,
“Other things being equal, higher the price of a
commodity, smaller is the quantity demanded
and lower the price of a commodity, larger is the
quantity demanded.”
In other words, other factors remaining
constant, if the price of a commodity rises,
demand for it falls and when price of a
commodity falls demand for the commodity
rises. Thus, there is an inverse relationship
between price and quantity demanded.
Symbolically, the functional relationship
between demand and price is expressed as :
Dx = f (Px)
Where D = Demand for a commodity x = Commodity
f = Function
Px = Price of a commodity
Assumptions :
Law of demand is based on the following
assumptions :
1) Constant level of income : If the law
of demand is to find true operate then,
consumers' income should remain constant.
If there is a rise in income, people may
demand more at a given price.
2) No change in size of population : It is
assumed that the size of population remains
unchanged. Any change in the size and
composition of population of a country
affects the total demand for the product.
3) Prices of substitute goods remain constant
: It is assumed that the prices of substitutes
remain unchanged. Any change in the price
of the substitute will affect the demand for
the commodity.
4) Prices of complementary goods remain
constant : It is assumed that the prices
of complementary goods remain unchanged
because a change in the price of one good
will affect the demand for the other.
5) No expectations about future changes in
prices : It is assumed that consumers do not
expect any further change in price in the
near future. If consumers expect a rise in
prices in future, they may demand more in
the present even at existing high price.
6) No change in tastes, habits, preferences,
fashions etc. : It is assumed that consumers'
tastes, habits, preferences, fashions etc.
should remain unchanged. Any change
in these factors will lead to a change in
demand.
7) No change in taxation policy : Taxation
policy of the government has a great impact
on demand for various goods and services.

Therefore, it is assumed that there is no
change in the policy of taxation declared
by Government.
The law of demand is explained with the
help of the following demand schedule and
diagram.
Demand schedule :
Table. 3.3
Price of
commodity ‘x’ (`)
Quantity demanded of
commodity ‘x’ (in kgs.)
50 1
40 2
30 3
20 4
10 5
As shown in Table 3.3 when price of
commodity ‘x’ is ` 50, quantity demanded is 1
kg. When price falls from ` 50 to ` 40, quantity
demanded rises from 1 kg to 2 kgs. Similarly, at
price ` 30, quantity demanded is 3 kgs and when
price falls from ` 20 to ` 10, quantity demanded
rises from 4 kg sto 5 kgs
Thus, as the price of a commodity falls,
quantity demanded rises and when price of
commodity rises, quantity demanded falls. This
shows an inverse relationship between price and
quantity demanded.

Exceptions to the Law of Demand :
There are certain exceptions to the law
of demand. It means that under exceptional
circumstances, consumer buys more when the
price of commodity rises and buys less when
price of commodity falls. In such cases, demand
curve slopes upwards from left to right.
Following are the exceptions to the law of
demand:
1) Giffen's paradox : Inferior goods or low
quality goods are those goods whose
demand does not rise even if their price
falls. At times, demand decreases when the
price of such commodities fall.
2) Prestige goods : Expensive goods like
diamond, gold etc. are status symbol. So
rich people buy more of it, even when their
prices are high.
3) Speculation : The law of demand does
not hold true when people expect prices to
rise still further. In this case, although the
prices have risen today, consumers will
demand more in anticipation of further rise
in price. For example, prices of oil, sugar
etc. tend to rise before Diwali. So people go
on purchasing more at a high price as they
anticipate that prices may rise during Diwali.
4) Price illusion : Consumers have an illusion
that high priced goods are of a better
quality. Therefore, the demand for such
goods tend to increase with a rise in their
prices.
5) Ignorance : Sometimes, due to ignorance
people buy more of a commodity at high
price. This may happen when consumer is
ignorant about the price of that commodity
at other places.
6) Habitual goods : Due to habit of consumption, certain goods like tea is
purchased in required quantities even at a
higher price.