An Introduction to Law Demand
Demand is a vital economic concept that works both at the market level and personal level. It also includes several concepts like law of demand, factors affecting it and eventually the impact of it on the economy at large. Therefore, it is essential for students to get this concept right from the very beginning as it will help to interpret the importance of the law of demand in economics.
However, to make things easier, learners need to delve into the core of this topic to score well.
What is the Law of Demand in Economics?
The law of demand in economics explains that when other factors remain constant, the quantity demand and price of any product or service show an inverse equation. It also means that whenever the value of a specific product increases, demand for the same declines; the exact opposite can also be observed. From this comes a concept of a demanding schedule.
Demand Schedule
This graphical representation shows that different quantities of product are demanded at varying prices. It thus calls for a law of demand graph to explain elaborately.
Analysis of Law of Demand
In order to run a business in a competitive market, it is essential to understand the law of demand definition economics. This law effectively indicates consumer choice behavior. Moreover, there is a dedicated graph that shows this relationship and helps economists to take economic measures accordingly.
This concept is based on a natural customer choice behavior. As a matter of fact, when the price of any good or service rises, demand for the same tends to fall as the consumers will not spend extra money on something than its standard price and will look for cheaper alternatives.
Moreover, often this question comes up in examinations like “explain law of demand with diagrams”. Therefore, it will be wiser to prepare the question beforehand to answer accurately.
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The above diagram contains a law of demand curve that is always downward sloping. It clearly shows that when the price increases from p2 to p1, the necessitated quantity decreases from Q2 to Q1.
Similarly, the law of demand in economics is an interesting chapter that also includes some related sub-topics like exceptions of this law and so on.
Let’s discuss!
Law of Demand Exceptions
In a few cases, the law of demand in economics does not follow the rule. For instance, often it happens that the demand for a particular product rises along with the price. Therefore, it is vital to know about the exceptions as well to comprehend the law better and understand real-life incidents.
For a good of prestige, the demand almost remains the same even if the price increases.
Similarly, for necessary commodities as well, the demand rises due to its increasing consumption, despite the price rise.
This applies as well in the case of Giffen goods.
These are some of the certain scenarios where the law deviates from its standard rendition.
Thus, to learn more about the law of demand in economics, download the Vedantu App and read vital notes on this topic. Moreover, they also offer various problems on this topic so that you can get a better grip on Economics.
Factors Affecting Demand
Several factors can influence the shape and position of the demand curve. Rising income tends to raise demand for common economic commodities since individuals are more eager to spend. The availability of close alternative items that compete with particular economic goodwill tends to reduce demand for that good since they can satisfy the same types of consumer wants and needs. Availability of closely complementary products, on the other hand, will tend to raise demand for an economic item, because combining two goods might be even more useful to consumers than utilising them individually. Other variables that vary the pattern of customer preferences for how the product may be utilized and how urgently it is needed, such as future expectations, changes in background environmental circumstances, or changes in the actual or perceived quality of a good, might shift the demand curve.
Importance of Law of Demand
Price Determination - The study of law of demand is helpful for a trader to fox up the price of a commodity. He understands how much demand will decline if the price of the commodity rises to a certain level, and how much demand will grow if the price of the commodity falls. The market demand schedule can offer information on overall market demand at various prices. It helps management in determining how much of a price rise or drop in a commodity is beneficial.
Importance to the Farmers - Farmers' economic situation is affected by whether they have a good or bad crop. If a good crop fails to generate demand, the crop's price will drop drastically. The farmer will not benefit from a successful harvest, and vice versa.
Importance to the Government - Governments evaluate the law of demand when deciding whether or not to impose additional taxes or tariffs on products, particularly when the amount demanded is not strongly influenced by price.
Major Facts about Law of Demand
It expresses the inverse relationship between demand and price. It basically states that an increase in price will cause a decrease in the amount requested, whereas a decrease in price would cause a rise in quantity demanded.
It simply makes a qualitative statement, indicating the direction of change in the quantity requested but not the magnitude of change.
It does not demonstrate a proportionate link between price changes and subsequent demand changes. If a price increases by 10%, the quantity demanded may decrease in any proportion.
The law of demand is one-sided since it only explains how price changes affect the amount required. It makes no mention of the impact of changes in demand on the price of the item.
Difference between Demand and Quantity Demanded
It is critical in economic theory to distinguish between the concept of demand and the amount demanded. The term "demand" in the chart refers to the green line that runs through A, B, and C. It expresses the link between the urgency of consumer desires and the quantity of the economic item available. A shift in demand shows that this curve's position or shape has changed; it represents a movement in the underlying pattern of consumer desires and requirements in relation to the resources available to satisfy them.
The term "quantity demanded," on the other hand, refers to a point on the horizontal axis. Variations in the quantity demanded are only due to price changes and do not indicate any shift in customer preferences. Changes in quantity demanded simply refer to movement along the demand curve as a result of a price adjustment. These two concepts are sometimes confused, but this is a common misunderstanding: prices do not reduce or raise demand; rather, they alter the amount required.
Relationship between Supply and Demand
The law of supply and demand asserts that the price of a product or service will vary depending on the amount sold by the supplier and the demand from consumers. Therefore, if a product is costly, the seller will ramp up manufacturing. However, If the price is extremely high, buyers will likely buy less of it, resulting in lower demand.
FAQs on Law of Demand: Determinants and Exceptions
1. What is the Law of Demand in economics?
The Law of Demand states that, assuming all other factors remain constant (ceteris paribus), there is an inverse relationship between the price of a good and its quantity demanded. In simple terms, when the price of a product falls, consumers will buy more of it. Conversely, when its price rises, the quantity demanded decreases. This fundamental principle reflects typical consumer behaviour.
2. Why does the demand curve slope downwards from left to right?
The downward slope of the demand curve is a graphical representation of the Law of Demand. It occurs due to three primary effects:
- Law of Diminishing Marginal Utility: As a person consumes more units of a good, the satisfaction (utility) from each additional unit declines. Therefore, they are only willing to buy more if the price is lower.
- Income Effect: A fall in a good's price increases the consumer's real income or purchasing power, allowing them to buy more of that good with the same budget.
- Substitution Effect: When a product's price falls, it becomes relatively cheaper than its substitutes. This encourages consumers to switch from the more expensive substitutes to the cheaper good, increasing its demand.
3. What is the core difference between a 'change in quantity demanded' and a 'change in demand'?
A 'change in quantity demanded' refers to a movement along the same demand curve, caused solely by a change in the product's own price. It is described as an 'expansion' or 'contraction' of demand. In contrast, a 'change in demand' signifies a complete shift of the demand curve (either rightward for an increase or leftward for a decrease). This shift is caused by changes in factors other than price, such as consumer income or tastes.
4. What are the main determinants that can cause a shift in the demand curve?
The determinants of demand are non-price factors that can shift the entire demand curve. The key determinants include:
- Income of the Consumer: Demand for normal goods rises with income, while demand for inferior goods falls.
- Prices of Related Goods: This covers substitute goods (e.g., coffee and tea) and complementary goods (e.g., cars and petrol).
- Tastes and Preferences: Changes due to trends, advertising, or health consciousness can alter demand.
- Expectations of Future Prices: If consumers anticipate a price hike in the future, current demand may increase.
- Number of Buyers: An increase in the consumer population leads to a rise in market demand.
5. What are the major exceptions to the Law of Demand?
Exceptions to the Law of Demand are situations where a higher price leads to higher demand, resulting in an upward-sloping demand curve. The main exceptions are:
- Giffen Goods: These are highly inferior goods that constitute a large part of a poor household's consumption.
- Veblen Goods: These are articles of snob appeal or prestige (e.g., luxury cars, designer watches) where a higher price enhances their value.
- Expectation of Future Scarcity or Price Rise: Consumers may buy more at a high price if they fear the good will become unavailable or even more expensive soon.
- Basic Necessities: For life-saving drugs or essential goods during an emergency, demand might not fall even if prices soar.
6. How do Veblen goods defy the conventional Law of Demand?
Veblen goods, or articles of conspicuous consumption, defy the Law of Demand because their appeal is directly linked to their high price. For these luxury items, the price is an indicator of status and exclusivity. A higher price tag makes the product more desirable to affluent consumers as a symbol of wealth. This behaviour, known as 'conspicuous consumption', means that lowering the price could actually reduce its prestige and, consequently, its demand.
7. Could you explain with an example why Giffen goods are an exception to the Law of Demand?
A Giffen good is a specific type of inferior good where the income effect of a price increase is stronger than the substitution effect. For example, consider a low-income family whose diet largely consists of a basic staple like coarse grain. If the price of this grain rises, their real income effectively drops. They now have so little money left that they cannot afford more expensive foods like vegetables or meat. As a result, they are forced to cut back on the expensive items and buy even more of the coarse grain just to meet their basic calorie needs. Here, the price rise led to an increase in quantity demanded.
8. In what practical ways is the Law of Demand important for businesses and governments?
Understanding the Law of Demand is crucial for real-world decision-making.
- For Businesses: It is the foundation of pricing strategy. By analysing how price changes affect sales, a company can set prices to maximize revenue and profit.
- For Governments: It informs fiscal policy, particularly taxation. When taxing goods like fuel or tobacco, the government uses this law to predict the impact on consumption and estimate tax revenue. It also helps in deciding subsidies for essential goods to make them more affordable.
9. Are 'determinants of demand' and 'exceptions to the Law of Demand' the same concept?
No, they are distinct economic concepts. Determinants of demand are the factors (like income or preferences) that cause the entire demand curve to shift, assuming the Law of Demand still holds at any given point. In contrast, exceptions to the Law of Demand refer to specific goods or scenarios (like Giffen and Veblen goods) where the fundamental inverse relationship between price and quantity demanded does not apply at all.
