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1.1.1 Law of Demand
According to law of demand, other things being equal, if the price of a commodity falls, the quantity demanded of it will rise and if the price of a commodity rises, its quantity demanded will decline.
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Thus, there is an inverse relationship between price and quantity demanded |
1.1.2 Rationale of law of demand
- Law of diminishing marginal utility: As people buy more of same good, marginal utility of every new unit will start falling.
- Substitution effect: When the price of a commodity falls, it becomes relatively cheaper than other commodities. It induces consumers to substitute the commodity whose price has fallen for other commodities which have now become relatively expensive.
- Income effect: When the price of a commodity falls, the consumer can buy the same quantity of the commodity with lesser money or he can buy more of the same commodity with the same money. In other words, as a result of fall in the price of the commodity, consumer’s real income or purchasing power increases.
- Different uses: Certain commodities have multiple uses. If their prices fall they will be used for varied purposes and demand for such commodities will increase.
- Conspicuous goods: Articles of prestige value or snob appeal or articles of conspicuous consumption are demanded only by the rich people and these articles become more attractive if their prices go up.
- Giffen goods: Generally those goods which are considered inferior by the consumers and which occupy a substantial place in consumer’s budget are called ‘Giffen goods’. Examples of such goods are coarse grains like bajra, low quality of rice and wheat etc.
- Conspicuous necessities: The demand for certain goods is affected by the demonstration effect of the consumption pattern of a social group to which an individual belongs. These goods, due to their constant usage, have become necessities of life. For example, in spite of the fact that the prices of television sets, refrigerators, coolers, cooking gas etc. have been continuously rising, their demand does not show any tendency to fall.
- Future expectations about prices: It has been observed that when the prices are rising, households expecting that the prices in the future will be still higher, tend to buy larger quantities of the commodities.
- Demand for necessaries: The law of demand does not apply in case of necessaries of life. Irrespective of price changes, people have to consume minimum quantities of necessary commodities.
- Speculative goods: In the speculative market, particularly in stock and shares, more will be demanded when the prices are rising and less will be demanded when the price declines.
1.1.3 Exceptions to the law of demand
- Conspicuous goods: Articles of prestige value or snob appeal or articles of conspicuous consumption are demanded only by the rich people and these articles become more attractive if their prices go up.
- Giffen goods: Generally those goods which are considered inferior by the consumers and which occupy a substantial place in consumer’s budget are called ‘Giffen goods’. Examples of such goods are coarse grains like bajra, low quality of rice and wheat etc.
- Conspicuous necessities: The demand for certain goods is affected by the demonstration effect of the consumption pattern of a social group to which an individual belongs. These goods, due to their constant usage, have become necessities of life. For example, in spite of the fact that the prices of television sets, refrigerators, coolers, cooking gas etc. have been continuously rising, their demand does not show any tendency to fall.
- Future expectations about prices: It has been observed that when the prices are rising, households expecting that the prices in the future will be still higher, tend to buy larger quantities of the commodities.
- Demand for necessaries: The law of demand does not apply in case of necessaries of life. Irrespective of price changes, people have to consume minimum quantities of necessary commodities.
- Speculative goods: In the speculative market, particularly in stock and shares, more will be demanded when the prices are rising and less will be demanded when the price declines.