Assumptions
Every law will have certain limitation or exceptions. While expressing the law of demand, the assumptions that other conditions of demand were unchanged. If remains 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
- The commodity is a normal good and has no prestige or status value.
- People do not expect changes in the prices.
- Quantity of the commodity remains constant.
- State of wealth of consumer does not change.
Exceptions to the law of demand
Generally, the quantity demanded of 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
As noted earlier, if there is an inferior good of which the positive income effect is greater than the negative substitution effect, the law of demand would not hold. For example, when the price of potatoes (which is the staple food of some poor families) decreases significantly, then a particular household may like to buy superior goods out of the savings which they can have now due to superior goods like cereals, fruits etc., not only from these savings but also by reducing the consumption of potatoes. Thus, a decrease in price of potatoes results in decrease in consumption of potatoes. Such basic good items consumed in bulk by the poor families, generally fall in the category of Giffen goods.
Commodities which are used as status symbols
Some expensive commodities like diamonds, air conditioned 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 greater amount of the commodity even at the presently increased price. Similarly, if the house hold expects the price of the commodity to decrease, it may postpone its purchases. Thus, law of demand is violated in such cases.
In the above circumstances, the demand curve does not slope down from left to right instead it presents a backward sloping from top right to down left as shown in diagram. This curve is known as exceptional demand curve
Law of demand explain the inverse relation b/w price of commodity and its demand, assuming other things remain constant. this negative relation itself implies downward movement of demand curve from left to right. But basically it happens due to main three effects or laws:
- Law of Diminishing marginal utility.
- Income effect, which simply talk about change in real income (Purchasing Power) of consumer. Whenever there fall in price of good exist, the purchasing power of consumer gets increase and thus she wants to purchase more.
- Substitution effect: for most of the goods substitutes or similar commodity are available. When there is change in price of one and it become cheaper as compare to its substitute, some buyer transform from present consumption towards those goods whose prices falls