Economics

The Law Of Demand With Diagram And Its Basic Assumptions

The Law of Demand denotes the quantitative relationship between quantity demanded of a commodity and its price. It explains the inverse relationship between quantity of a commodity and its price. The Law is based on an important assumption namely ”Other things or conditions remaining constant”. That means this law assumes other conditions like availability of substitutes Or complementaries, consumer’s tastes and fashions, income, price etc remain constant. If these conditions change, this law does not hold good.

Assumptions of the Law of Demand :

1. Tastes and Preferences : The Law of Demand assumes that consumer’s tastes and preferences remain the same. If consumer’s tastes and preferences change, quantity demanded of a commodity by the consumers also change.

2: Population : Constancy in population is another assumption of the Law of demand. In fact population and demand are directly related to each other. Demand for a commodity will be great, when population of a country increase. Similarly when the size of population is low, demand for commodities also remains less.

3. Discovery of substitutes : Discovery of substitutes influence the quantity demanded of a commodity. Demand changes whenever a new substitute product is discovered. The law of demand assumes that no new substitutes are discovered in the market.

4. Income : Demand and income are directly related to one another. Consumers purchase more quantity of a commodity with a rise in their income. Similarly they reduce their demand for a commodity when their income falls. The law of demand assumes constancy in income.

5. Weather conditions : Change in weather and season.also affect the demand for a commodity. For example people demand cool drinks during summer and hot drinks in winter. The law of demand assumes constancy in weather conditions.

6. Prices of other goods : Demand for a good also depends on the price of other goods. These goods may be substitutes or complementaries. Tea and coffee are an example of substitutes. If the price of tea increases, demand tor coffee rises even though the price of the latter remains unchanged. Similarly, car and petrol are considered complementaries. When price of car decreases, the demand for petrol increases as new consumers buy cars and demand petrol for using in their vehicles. A change in the price of other good affects the demand of a good. This law assumes that prices of related good do not change,

Demand function: The law 0f demand denotes the functional relationship between quantity demanded and the price of a commodity. This may be explained with the help of the following equation,

Dx=f(Px)

¬†Where Dx means the demand for the commodity x. Px. means the price of the commodity ‘x’, f means function.

Demand schedule :Demand schedule denotes the relationship between quantity demanded of a commodity and its price.Demand schedule is shown below. :

Price of Coffee (USD) Demand for Coffee
5 10000
4 20000
3 30000
2 50000

The above Demand schedule denotes that more quantity of coffee is purchased when price is low.

Diagrammatic representation : The above demand schedule can be represented in the following diagram :

Law of demand

In the diagram quantity demanded of a commodity is shown along OX axis and Price on Y axis. DD is the demand curve. It slopes downwards from left to right. It denotes that a consumer purchases more quantity of a commodity at lower prices and less quantity at higher prices.

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