Law of Demand
Law of DemandWhat 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.
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.
Initially discovered by Robert Giffen, economists disagree on the existence of Giffen goods in the market. A...