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Meaning of Demand
In simple terms, demand refers to the desire or want to obtain any good or service. However, in economics, not all desires or wants are considered demand. In economics, a desire is called demand only when the individual has both the ability to pay the price and the willingness to pay the price.
If a person has the desire to obtain a good but lacks the ability to pay for it, that desire cannot be considered demand. Similarly, even if they have the ability to pay for a desired good, if they are unwilling to pay the price, that desire cannot be considered demand.
Therefore, for any desire to be considered demand in economics, both the ability to pay and the willingness to pay must be present.
The Law of Demand
Consumers demand goods or services. When the price of a good or service decreases, consumers demand a larger quantity of that good or service, and when the price increases, they demand a smaller quantity. The law of demand explains the relationship between the price of a good or service and the quantity demanded of that good or service.
The proponent of the law of demand is economist Alfred Marshall. The law of demand states that, other things remaining equal, there is an inverse or negative relationship between the price of a good and the quantity demanded. That is, other things remaining equal, if the price of a good falls, the quantity demanded increases, and if the price increases, the quantity demanded decreases.
Economist Alfred Marshall, defining the law of demand, said, "Other things remaining the same, the amount demanded increases with a fall in price, and diminishes with a rise in price."
Therefore, the law of demand states that, other things remaining equal, a change in the price of a good causes a change in the quantity demanded of that good in the opposite direction.
When stating the law of demand, the phrase "other things remaining equal" is used. Here, "other things" refers to factors like the consumer's income, tastes and preferences, the price of substitutes or complements, etc., which are assumed to be constant or unchanged. These conditions are the assumptions of the law of demand.
The law of demand is based on the following assumptions:
(a) The consumer's income remains constant.
(b) There is no change in the quality of the good consumed by the consumer.
(c) The price of substitutes or complements remains constant.
(d) There is no change in the consumer's habits, preferences, fashion, tastes, and priorities.
(e) There is no change in the size and composition of the population.
(f) The consumer's expectations about the future price of the good do not change.
The law of demand can be explained using the following table (demand schedule):
Demand Schedule
| Price of goods (Rs. per kg) | Quantity Demanded of goods (kg per week) |
|---|---|
| 20 | 5 |
| 40 | 4 |
| 60 | 3 |
| 80 | 2 |
| 100 | 1 |
The above demand schedule shows the quantity of a particular good demanded at different prices in a week. Initially, when the price of goods is Rs. 20 per kg, the quantity demanded is 5 kg per week. When the price of goods increases from Rs. 20 to Rs. 40, the quantity demanded decreases from 5 kg to 4 kg per week.
Similarly, as the price of goods gradually increases to Rs. 60, Rs. 80, and Rs. 100 per kg, the quantity demanded decreases to 3, 2, and 1 kg per week, respectively. Here, as the price of goods increases, the quantity demanded decreases, indicating an inverse or negative relationship between the price of the good and the quantity demanded. Therefore, the demand schedule shown above illustrates the law of demand.
The law of demand can be explained graphically using the demand curve, which is constructed based on the above table:
In the graph, the x-axis measures the quantity demanded of goods (in kg), and the y-axis measures the price of goods (in Rs. per kg). Initially, when the price of goods is Rs. 20 per kg, the quantity demanded is 5 kg per week, as shown by point E. Then, as the price of goods increases to Rs. 40 per kg, the quantity demanded decreases to 4 kg per week, as shown by point D.
Similarly, as the price of goods increases to Rs. 60 per kg, the quantity demanded decreases to 3 kg per week, represented by point C. When the price increases to Rs. 80 per kg, the quantity demanded decreases to 2 kg per week, shown by point B. If the price of goods further increases to Rs. 100 per kg, the quantity demanded decreases to 1 kg per week, represented by point A.
This shows that as the price of goods increases, the quantity demanded decreases. If we sequentially join the points A, B, C, D, and E, we get the line AE, which is called the demand curve. This demand curve slopes downwards from left to right, or has a negative slope.
Therefore, it shows the inverse or negative relationship between the price of the good and the quantity demanded. Thus, the demand curve AE illustrates the law of demand.
In this way, the law of demand explains the inverse relationship between the price of any good and the quantity demanded of that good.
Limitations or Exceptions of the Law of Demand
The situations where the law of demand does not apply are called the limitations or exceptions of the law of demand. The main limitations or exceptions of the law of demand are mentioned below:
(a) If the consumer's income changes: When the consumer's income increases or decreases, the demand for a good also increases or decreases according to the nature of the good. For example, if the consumer's income increases, the demand for normal goods increases even if the price remains constant, while the demand for inferior goods decreases. Similarly, if the consumer's income decreases, the demand for normal goods decreases even if the price remains constant, while the demand for inferior goods increases. In this way, the law of demand may not apply when there is a change in the consumer's income.
(b) If there is a change in the quality of the good consumed by the consumer: If there is a decrease in the quality of the good consumed by the consumer, the consumer may not increase the demand even if the price of the good decreases. If there is an increase in the quality of the good, the consumer may increase the demand even if the price of the good increases. Therefore, the law of demand may not apply when there is a change in the quality of the good consumed by the consumer.
(c) If the price of substitutes or complements changes: A substitute good (x) is another good that can be used in place of a particular good (w). For example, even if the price of tea remains constant, if the price of coffee increases, the demand for tea will increase, and if the price of coffee decreases, the demand for tea will decrease. If two goods (y and z) are related in such a way that an increase in the use of one good (x) requires an increase in the use of the other good (z), then these two goods (y and z) are complements.
For example, milk for tea, ink for pens, and petrol for motorcycles are considered complements. For example, even if the price of petrol remains constant, if the price of its complement, motorcycles, increases, the demand for petrol will decrease.
Similarly, if the price of motorcycles decreases, the demand for petrol will increase. Therefore, the law of demand does not apply even when there is a change in the price of substitutes or complements of a good.
(d) If there is a change in the consumer's habits, preferences, fashion, tastes, and priorities: The law of demand does not apply if there is a change in the consumer's habits, preferences, fashion, tastes, and priorities.
For example, when the fashion for a leather jacket increases, the demand for it may increase even if its price increases, while when the jacket is out of fashion, the demand may not increase even if the price decreases. In this way, the law of demand does not apply when there is a change in the consumer's habits, preferences, fashion, tastes, and priorities, including fashion.
(e) If there is a change in population: If the population increases and the number of people buying or consuming the good increases, the demand for that good may not decrease even if its price increases. Similarly, if the population decreases, the demand for that good may not increase even if its price decreases. Therefore, the law of demand may not be effective in these situations.
(f) If the consumer's expectations about the future price of the good change: The law of demand does not apply if the consumer's expectations about the future price of the good change. For example, if the consumer expects the price of a good to increase significantly in the near future, they may hoard a larger quantity of the good at the current price even if the current price does not decrease.
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