The **Law of Demand** states that, *”Other things being equal, there is an inverse relationship between the price of a commodity and its quantity demanded.”* This fundamental economic principle suggests that as the price of a good or service decreases, consumers tend to purchase more of it, and as the price increases, they purchase less, assuming other factors remain constant.
## Assumptions of the Law of Demand
Like other economic laws, the Law of Demand operates under the condition of *ceteris paribus* (other things being equal). This implies that certain factors must remain unchanged for the law to hold true. The key assumptions are:
1. **The commodity is normal**: The good in question is not inferior or a luxury good with unique demand characteristics.
2. **No change in tastes, habits, fashions, or customs**: Consumer preferences remain stable.
3. **No change in consumer income**: Income levels do not fluctuate, as this could alter purchasing power.
4. **No change in prices of related goods**: Prices of substitutes or complements remain constant.
5. **No expectation of future price changes**: Consumers do not anticipate price increases or decreases that could influence current demand.
6. **Goods are perfectly divisible**: The commodity can be purchased in any quantity, not just in fixed units.
7. **Normal economic conditions**: The economy is free from abnormal situations like war, inflation, depression, or revolution.
Under these assumptions, it is commonly observed that consumers purchase larger quantities of a commodity or service at lower prices and smaller quantities at higher prices. This behavior underpins the Law of Demand.
### Example
Consider a market where consumers buy 300 meters of cloth when the price is \$40 per meter. If the price drops to \$35 per meter, new consumers may enter the market, and existing consumers may buy more, leading to an increase in total demand (e.g., 350 meters). Conversely, if the price rises to \$45 per meter, both existing and potential buyers may reduce their purchases, causing demand to contract (e.g., 250 meters). This inverse relationship between price and quantity demanded illustrates the Law of Demand.
## Definitions by Economists
– **Alfred Marshall**: *”The amount demanded increases with a fall in price and diminishes with a rise in price.”*
– **S.E. Thomas**: *”At any given time, the demand for a commodity or service at the prevailing price is greater than it would be at a higher price and less than it would be at a lower price.”*
– **Paul Samuelson**: *”People will buy more at lower prices and buy less at higher prices, ceteris paribus or other things being equal.”*
## Tabular Representation
The inverse relationship between price and quantity demanded can be illustrated with the following table:
| Price (Px) | Quantity Demanded (Qx) |
|:———-:|:———————-:|
| 1 | 4 |
| 2 | 3 |
| 3 | 2 |
| 4 | 1 |
As the price increases from 1 to 4, the quantity demanded decreases from 4 to 1, demonstrating the Law of Demand.
## Graphical Representation
The Law of Demand can also be depicted using a demand curve, which slopes downward from left to right, showing the inverse relationship between price and quantity demanded.
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## Exceptions to the Law of Demand
While the Law of Demand holds true in most cases, there are exceptions where the inverse relationship between price and quantity demanded does not apply. These include:
1. **Fear of shortage**: If consumers anticipate a shortage of a commodity, they may purchase more even at higher prices to stock up for the future.
2. **Expectation of future price changes**: If consumers expect prices to rise in the future (e.g., during inflation), they may buy more at current higher prices. Conversely, if prices are expected to fall, they may delay purchases, reducing demand despite lower prices.
3. **Inferior or Giffen goods**: For inferior goods, as consumer income rises, demand decreases. For Giffen goods, an increase in price may lead to an increase in demand, as consumers substitute these goods for more expensive alternatives.
4. **Goods for distinction**: Luxury goods like gold, diamonds, or high-end cars may see higher demand as prices rise, as they confer social status (Veblen effect).
5. **Ignorance**: If consumers are unaware of price changes or alternatives, they may purchase more of a commodity even at a higher price.
6. **Influence of fashion**: When a product is in fashion, consumers may buy more despite price increases. Conversely, out-of-fashion goods may see reduced demand even at lower prices.
7. **Influence of habit**: For habit-forming goods like tobacco, liquor, or drugs, consumers may continue purchasing even if prices rise, defying the Law of Demand.
## Conclusion
The Law of Demand is a cornerstone of economic theory, explaining consumer behavior in response to price changes under specific conditions. However, its exceptions highlight the complexity of consumer preferences and market dynamics, where factors like expectations, habits, and social influences can alter demand patterns. Understanding both the law and its exceptions is crucial for analyzing real-world economic scenarios.