Law of demand
Suppose you want to buy mangoes at Rs.100 per dozen you buy 6 dozens. If the price
of mangoes increase to 200/- then how much will you buy? Definitely less quantity of
goods. What kind of relationship is there between the price and quantity demanded?
There is inverse relation.
The law of demand states that “Ceteris paribus (other things remaining the same),
higher the price, lower the demand and vice versa”. The law is stated primarily in
terms of the price and quantity relationship. The quantity demanded is inversely
related to its price.
Here we consider only two factors i.e. price and quantity demanded.
Chief characteristics:
So by observing a demand curve the chief characteristics are;


Inverse relationship between the price and the quantity demanded. This is
shown by the downward sloping demand curve.
Price is an independent variable and the demand is dependent. It is the effect
of price on demand and not vice versa.
Reasons underling the law of demand- this inverse relationship can be explained in
terms of two reasons, viz,
1. Income effect: The decline in the price of a commodity leads to an equivalent
increase in the income of a consumer because he has to spend less to buy the
same quantity of goods. The part of the money left can be used for buying
some more units of commodity. For e.g. Suppose the price of mangoes falls
from Rs.100/- per dozen to 50/- per dozen. Then with the same amount of
100/- you can buy one more dozen, i.e.,2 dozens at Rs. 50/2. Substitution effect: When the price of a commodity falls, the consumer tends
to substitute that commodity for other commodity which is relatively dearer.
For e.g. Suppose the price of the Urad falls, it will be used by some people in
place of other pulses. Thus the demand will increase.
Exceptions of Law of demand:
1) Conspicuous consumption:
The goods which are purchased for ‘Snob appeal’ are called as the conspicuous
consumption. They are also called as ‘Veblen goods because Veblen coined this term.
For e.g.- diamonds, curios. They are the prestige goods. The would like to hold it only
when they are costly and rare.
So, what can be the policy implication for the manager of a company who produces
it? A producer can take advantage by charging high premium prices.
2) Speculative market:
in this case the higher the price the higher will be the demand. It happens because of
the expectation to increase the price in the future.
For e.g. shares, lotteries, gamble and ply-win type of markets.
3) Giffens goods:
It is a special type of inferior goods where the increase in the price results into the
increase In the quantity demanded. This happens because these goods are consumed
by the poor people who would like to buy more if the price increases.
For e.g. a poor person who buys inferior quality vegetables. If the price of such
vegetable increase then they prefer to buy because they think that it would be of a
better quality
4) Ignorance:
Many a times consumer judges the quality of a good from its price. Such consumers
may purchase high price goods because of the feeling of possessing a better quality.
MBA- Knowledge Base