What is demand?
In economics, the law of demand is an economic law, which states that consumers buy more of a good when its price is lower and less when its price is higher (ceteris paribus).
When the price of a product is increased then less will be demanded. Also is the same for the opposite, when the price of a product is decreased then more will be demanded.
The Law of demand states that the quantity demanded and the price of a commodity are inversely related, other things remaining constant. That is, if the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in quantity of good demanded by the consumer will be negatively correlated to the change in the price of the good.
Assumptions
Every law will have limitations or exceptions. While expressing the law of demand, the assumption is that other conditions of demand are unchanged. If they don't remain constant, the inverse relation may not hold well. In other words, it is assumed that the income and tastes of consumers and the prices of other commodities are constant. This law operates when the commodity’s price changes and all other prices and conditions do not change.
The main assumptions are: * Habits, tastes and fashions remain constant. * Money, income of the consumer does not change. * Prices of other goods remain constant. * The commodity in question has no substitute or is not in competition by other goods. * The commodity is a normal good and has no prestige or status value. * People do not expect changes in the price. * Price is independent and demand is dependent.
Exceptions to the law of demand
Generally, the amount demanded of a good increases with a decrease in price of the good and vice versa. In some cases, however, this may not be true. Such situations are explained below.
Giffen goods
Initially discovered by Robert Giffen, economists disagree on the existence of Giffen goods in the market. A Giffen good describes an inferior good that as the price increases, demand for the product increases. As an example, during the Irish Potato Famine of the 19th century, potatoes were considered a Giffen good. Potatoes were the largest staple in the Irish diet, so as the price rose it had a large impact on income. People responded by cutting out on luxury goods such as meat and vegetables, and instead bought more potatoes. Therefore, as the price of potatoes increased, so did the demand.[1]
Commodities which are used as status symbols
Some expensive commodities like diamonds, air conditioned expensive cars, etc., are used as status symbols to display one’s wealth. The more expensive these commodities become, the higher their value as a status symbol and hence, the greater the demand for them. The amount demanded of these commodities increase with an increase in their price and decrease with a decrease in their price. Also known as a Veblen good.
Expectation of change in the price of commodity
If a household expects the price of a commodity to increase, it may start purchasing a greater amount of the commodity even at the presently increased price. Similarly, if the household expects the price of the commodity to decrease, it may postpone its purchases. Thus, law of demand is violated in such cases. In this case, the demand curve does not slope down from left to right; instead it presents a backward slope from the top right to down left. This curve is known as an exceptional demand curve. Technically, this is not a violation of the law of demand, as it violates the ceteris paribus condition.
Law of demand and changes in demand
The law of demand states that, other things remaining same, the quantity demanded of a good increases when its price falls and vice-versa. Note that demand for goods changes as a consequence of changes in income, tastes etc. Hence, demand may expand or contract and increase or decrease. In this context, let us make a distinction between two different types of changes that affect quantity demanded, viz., expansion and contraction; and increase and decrease.
While stating the law of demand i.e., while treating price as the causative factor, the relevant terms are Expansion and Contraction in demand. When demand is changing due to a price change alone, we should not say increase or decrease but expansion or contraction. If one of the non-price determinants of demand, such as the prices of other goods, income, etc. change & thereby demand changes, the relevant terms are increase and decrease in demand. The expansion and contraction in demand are shown in the diagram. You may observe that expansion and contraction are shown on a single DD curve. The changes (movements) take place along the given curve k.
Limitation
* Change in taste or fashion. * Change in income * Change in other prices. * Discovery of substitution. * Anticipatory change in prices. * Rare or distinction goods.[2]
There are certain goods which do not follow this law. These include Veblen goods and Giffen goods.