EXPLANATION OF LAW OF DEMAND WITH THE EXCEPTIONS

• CA  AND CS FOUNDATION BUSINESS ECONOMICS
  THEORY OF DEMAND AND SUPPLY
  LAW OF DEMAND
  
  
• MEANING OF LAW OF DEMAND

1. LAW OF DEMAND STATES THAT OTHER THINGS BEING EQUAL DEMAND FOR A GOOD EXTENDS WITH A FALL IN PRICE AND CONTRACTS WITH A RISE IN PRICE.
2. D_X = F( P_X,Y,T,E,P_R……) INCOME, PRICE OF RELATED GOODS, EXPECTATION AND TASTE AND PREFERENCE ETC ASSUMED TO BE CONSTANT.
3. IN SIMPLE WORDS WE CAN SAY  LAW OF DEMAND EXPLAINS THE INVERSE RELATION BETWEEN PRICE AND DEMAND OF A COMMODITY.

• ACCORDING TO MARSHALL :- “THE LAW OF DEMAND STATES THAT  AMOUNT DEMANDED INCREASE WITH FALL IN PRICE AND DIMINISHES WITH RISE IN PRICE, BEING OTHER THINGS REMAINING THE SAME.

• ASSUMPTION OF LAW OF DEMAND

1. NO CHANGE IN THE INCOME OF THE CONSUMER
2. NO CHANGE IN THE PRICE OF RELATED GOODS
3. NO EXPECTATION OF ANY CHANGE IN THE FUTURE PRICE OF THE COMMODITY
4. NO CHANGE IN THE TASTE AND PREFERENCE
5. NORMAL GOODS

• DEMAND SCHEDULE
• DEMAND SCHEDULE IS A SCHEDULE WHICH SHOWS VARIOUS AMOUNTS OF A COMMODITY THAT THE CONSUMER IS READY TO BUY AT DIFFERENT POSSIBLE PRICES OF THAT COMMODITY AT GIVEN TIME

1. INDIVIDUAL DEMAND SCHEDULE
2. MARKER DEMAND SCHEDULE

• INDIVIDUAL DEMAND SCHEDULE
• INDIVIDUAL DEMAND SCHEDULE IS DEFINED AS THE TABLE WHICH SHOWS QUANTITIES  OF  A GIVEN COMMODITY WHICH AN INDIVIDUAL CONSUMER WILL BUY AT ALL POSSIBLE PRICES AT GIVEN TIME.
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• EXPLANATIONS
• IT IS CLEAR FROM THE TABLE AS THE PRICE GOES ON INCREASING AND DEMAND GOES ON CONTRACTING.
• DEMAND CURVE : IS A GRAPHIC PRESENTATION OF A DEMAND SCHEDULE.
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• MARKET DEMAND SCHEDULE
• MARKET DEMAND SCHEDULE IS DEFINED AS THE QUANTITIES OF GIVEN COMMODITY WHICH ALL CONSUMERS WILL BUY AT ALL POSSIBLE PRICES AT A GIVEN MOMENT TIME.IT SHOWS THE AGGREGATE DEMAND OF ALL THE CONSUMERS AT DIFFERENT PRICES OF ONE PARTICULAR COMMODITY AT A GIVEN TIME.
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• MARKET DEMAND CURVE
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• MAIN POINTS OF THE LAW OF DEMAND

1. INVERSE RELATION SHIP
2. QUALITATIVE AND NOT QUANTITATIVE
3. NO PROPORTIONAL RELATION SHIP
4. COMPARISON WITH THE GAME OF SEA AND SAW
5. ONE SIDED

• REASON OF DEMAND CURVE SLOPING DOWNWARD

1. LAW OF DIMINISHING MARGINAL UTILITY: A CONSUMER DEMANDS A COMMODITY BECAUSE OF UTILITY. AS HE  CONSUMES MORE UNITS OF A COMMODITY IN GIVEN TIME THE UTILITY GOES ON DIMINISHING. A CONSUMER WILL STOP PURCHASE AT THAT POINT WHERE THE MARGINAL UTILITY OF THE COMMODITY IS EQUAL TO THE PRICE PAID FOR IT.

PRICE= MARGINAL UTILITY

2. INCOME EFFECT: INCOME EFFECT IS THE EFFECT THAT A CHANGE IN PERSON’S REAL INCOME CAUSED BY CHANGE IN THE PRICE OF COMMODITY HAS ON THE QUANTITY OF THAT COMMODITY.REAL INCOME IS THAT INCOME WHICH IS MEASURED IN TERMS OF GOODS AND SERVICES THAT A CONSUMER CAN BUY WITH HIS GIVEN MONEY INCOME.

3. SUBSTITUTION EFFECT:-SUBSTITUTE ARE GOODS THAT CAN BE USED IN PLACE OF EACH OTHER.  WHEN THE PRICE OF ONE GOODS CHANGE RELATIVE TO ANOTHER,THE RELATIVELY LESS EXPENSIVE GOODS WILL BE SUBSTITUTED FOR THE MORE EXPENSIVE ONE
4. DIFFERENT USES:- SOME GOODS HAVE MORE THAN ONE USE. LIKE MILK COULD BE USED FOR DRINKING/SHAKES/COFFEE/TEA/CHEESE/CURD/SWEETS ETC. AT HIGH PRICE IT WILL BE USED FOR NECESSARY THINGS.
5. SIZE OF  CONSUMER GROUPS:-WHEN THE PRICE OF A COMMODITY FALLS,THEN MANY CONSUMERS WERE UNABLE TO BUY THAT COMMODITY AT ITS PREVIOUS PRICE,COMES FORWARD TO BUY IT. BUT IF THE PRICE GO ES UP MANY CONSUMER WILL WITHDRAW FROM THE MARKET.

• EXCEPTIONS

·         SOME EXCEPTIONS TO LAW OF DEMAND WHERE DEMAND CURVE SLOPES UPWARD

1. ARTICLES OF DISTINCTION OR VEBLEN GOODS:-ARTICLES OF DISTINCTION WILL BE DEMANDED WHEN THE PRICES ARE HIGH.
2. IGNORANCE:-MANY A TIME, CONSUMER JUST OUT OF IN IGNORANCE OR POOR JUDGEMENT CONSIDER A COMMODITY TO BE OF LOW QUALITY AT LOW PRICE AND HIGH QUALITY AT HIGH PRICE

3. GIFFEN GOODS:-NAMED AFTER ECONOMIST SH ROBERT GIFFIN ARE THOSE INFERIOR GOODS WHOSE DEMAND FALLS WHEN THE PRICE FALLS. AS THE REAL INCOME OF THE CONSUMER GOES HE WILL DEMAND BETTER GOODS AND WHEN PRICE OF GIFFEN GOODS RISE.HIS REAL INCOME FALLS HE WILL BUY MORE OF IT.
4. EXPECTATION OF RISE OR FALL IN THE PRICE IN THE FUTURE: IF EXPECTATION OF FURTHER RISE IN FUTURE PEOPLE WILL BUY MORE OR IF THERE IS EXPECTATION THAT THERE IS FALL IN PRICE IN FUTURE THEN PEOPLE WILL POSTPONE THEIR PURCHASE IN FUTURE.
5. CONSPICUOUS NECESSITIES:- AFFECTED BY THE DEMONSTRATION EFFECT OF THE CONSUMPTION PATTERN OF A SOCIAL GROUP TO WHICH AN INDIVIDUAL BELONG BECOMES NECESSITIES. ON INCREASED PRICE DEMAND WILL NOT BE LESS

6. CONSUMER TEND TO BE IRRATIONAL
7. THE LAW OF DEMAND DOES NOT APPLY MUCH IN CASE OF NECESSARIES GOODS
8. SPECULATIVE GOODS:PARTICULARLY IN THE SHARE MARKET,MORE WILL BE DEMANDED WHEN THE SHARE PRICE ARE RISING