Law of Demand
Demand:
Demand
is defined as a schedule that shows the amounts of a product or service the
consumers are willing and able to purchase at each price during a specific time
and specific markets.
According
to Bowden, “Demand is the propensity of the consumers to buy different
quantities of a particular good at different unit prices”.
Here,
desire and ability to buy are the key components of demand whereas time and
Markets are two requisites.
Market
Demand:
Market
demand is the sum of the demand of all the consumers in a market for a given commodity at a specific point of time. It is a horizontal summation of the demand
of individual consumers at each unit price.
Kinds of Demand: There are three kinds of demand.
1.
Price
Demand: It refers
to various quantities of a good or service that a consumer would be willing to
purchase at all possible prices in a given market at a given time, ceteris
paribus. Ceteris paribus includes other factors remain unchanged mainly income,
tastes, prices, inter-related goods, etc.
2.
Income
Demand: It refers
to various quantities of a good or services that a consumer would be willing to
purchase at different levels of income, ceteris paribus.
3.
Cross
Demand: It refers
to various quantities of a good or service that a consumer would be willing to
purchase not due to change in price this commodity, but due to a change in price
of other related commodities.
LAW
OF DEMAND:
The
law states that inverse relationship between quantity demanded and price, with
other conditions remaining the same.
The
inverse relationship does not lie proportionately. If the price falls by 15%,
it does not follow that the demand will increase exactly by 15%. We can only
say that demand will rise when the price falls, but we cannot say much. Here, the
tendency of the consumer is to buy more quantities of a commodity at a lower
price than what he buys at a higher price.
Demand Curve Slopes Downwards:
Generally, the demand curve slopes downwards as shown in Fig 1.
There are three evident reasons why people buy more when the price falls.
ü A unit of the money goes farther and a
consumer can afford to buy more.
ü When the commodity becomes cheaper
one naturally buys more.
ü A commodity tends to be put to more
uses when it becomes cheaper.
The
demand curve simply shows how the quantity demanded varies with the variation
in price. Along OX are represented the quantity demanded of goods and along OY
the prices. It will be seen that from fig 1; at the price OP, OQ quantity demanded.
At OP’ quantity demanded is OQ’ and at OP’’ price is OQ’’.
The demand curve is also known as
Average Revenue (AR) curve, because the price paid by the consumer is revenue
per unit (i.e. average revenue for the seller).
The law of demand explained further with the following two
curves.
1) Extension and Contraction of Demand (Movement along the demand Curve):
Extension and contraction observed;
when the demand changes merely because the price has changed. Extension of
demand means more demand at fewer prices. If a man buys less when the price
rises, it is simply a contraction of demand. But, if he buys less irrespective
of price, it means a decrease in demand.
Here, we travel up and down on the same curve signifies that the demand changes only due to a change in prices.
This is a movement along the demand curve as shown in Fig 2. The downward
movement from D2 to D3 is an extension and the upward
movement from D2 to D1 is contraction. It represents a change in quantity demanded.
2) Increase and Decrease of Demand (Shift in the demand curve):
An increase in demand means greater
demand at the same price or the same quantity demanded at a higher price. If
the demand changes independently of the prices and a man buy more; it is
increase in demand.
As the demand increases, the demand curve
shifts towards the right side of the initial demand curve DD. Hence, D1D1
is the new demand curve representing an increase in demand. At OP’ price, the
quantity demanded is OQ
A decrease in demand means less demand
at the same price or the same quantity demanded at a lower price. Here,
according to Fig. 3, we get entirely new curves above and below the original
curve.
As the demand decreases, the demand
curve shifts towards the left downwards of the initial demand curve DD. Hence, D2D2
is the new demand curve representing a decrease in demand. It reflects that
purchase of the same quantity of a commodity OQ at a lower price of OP’’. This is a shift in the demand curve.
Exceptions
to law of Demand:
1.
Giffen
Goods or Inferior Goods:
The phenomenon explained by Sir Robert Giffen. According to it, a rise in price
is followed by an extension of demand, while a fall in price is followed by a reduction in demand for the good. Goods for which demand increases as income
increases are referred to as Normal Goods. While ‘Goods for which demand
decreases as income increases are referred to as Inferior Goods’.
It
clearly means that sometimes people will buy more when the prices rise and the demand curve moves upwards.
2.
Prestigious
Goods: In case the
commodity have distinctive feature people will buy more when its price is
higher.
3.
Fear
of Shortage:
When a serious shortage is feared, people buy more even though the prices are
rising.
4.
High
Priced Commodities:
According to the consumer when he thinks that some superior products fetch
higher price, they are ready to buy with the increased price.
5.
Trade
Cycles: During
times of economic prosperity people buy more even though the price goes up, since
people’s income has gone up.
6.
Forecasting: If people believe that price
of certain goods is going to increase in the future, they may try to purchase them
in the present times even at a higher price. Such a phenomenon is observed in stock
Market.
