Law of Demand Definition
The Law of demand is the concept of the economics according to which the prices of the goods or services and their quantity demanded is inversely related to each other when the other factors remain constant. In other words, when the price of any product increases then its demand will fall, and when its price decreases then its demand will increase in the market.
This happens because of the concept of the diminishing marginal utility which states marginal utilityMarginal UtilityA customer's marginal utility is the satisfaction or benefit derived from one additional unit of product consumed. It could be calculated by dividing the additional utility by the amount of additional units. of the goods or service declines when there is an increase in its available supply i.e., the consumer uses first units of good purchased to serve their need which they think is most urgent over the less urgent demands in their behavior. So, in the economic law of demand works with the law of supply for determining and explaining that how the resources are being allocated in the market economies and how the prices of the goods and services of that reused in the day to day work are determined.
Example of Law of Demand in Economics
Let’s take an example of the law of demand in economics.
There is a company XYZ ltd which is selling only one type of good in the market. Following is the demand schedule of the company showing how much quantity will be demanded that product at a particular price during that day. Explain the relationship between the price and quantity demanded when all the assumption of the law of demand holds true.
|Price per Unit ($)||$100||$250||$500||$750||$1,000|
According to the law of demand in economics, when the price of any product increases then its demand will fall, and when its price decreases then its demand will increase in the market. In the present case, it can be seen that when the prices per unit of the quantity of the product sold by company XYZ is increasing from $ 100 to $ 250, then the quantity demandedQuantity DemandedQuantity demanded is the quantity of a particular commodity at a particular price. It changes with change in price and does not rely on market equilibrium. the product is decreasing from 50 units to 35 units when the prices per unit of the quantity of the product sold by company XYZ is increasing from $ 250 to $ 5000, then the quantity demanded the product is decreasing from 35 units to 25 units and so on.
This shows that the prices of the commodity and its demand are inversely related. Thus here also with the increase in the price per unit of the quantity, the demand for its quantity is decreasing so this is the example of the concept of law of demand.
Advantages of the Law of Demand in Economics
There are several different advantages of the law of demand providing the opportunity for the traders, consumers, and other related parties. Some of the advantages are as follows:
- It helps the party selling the different goods in fixing the price of their sold commodities as it will let them know that if they will increase or decrease the prices of the demand then what will be its corresponding effect on the quantity that will be demanded by its customers.
- The study of the law of demand in economics is of great importance to the finance minister of every country as the change in the rate of tax will change the prices of the different commodities thereby affecting its demand in the market.
Disadvantages of the Law of Demand
The different limitations and drawbacks of the law of demand in economics include the following:
- They do not hold true in every situation such as the situation of war, depression, demonstration effect, Giffen paradox, speculation, ignorance effect, and necessities of life. for example, if it is feared by the people of one country that there might be some war in some coming days then in anticipation of war, then they will start buying their required stocks and store them for the use at the time of war even if the prices of those goods keeps on increasing. Thus this is the exception of the law of demand as even with the increase in prices of the goods, in war situation demand of those goods will not decrease.
- There are certain assumptions about the law of demand. If any of the assumptions do not hold true then the law of demand will not be applicable in those cases.
- When there is a lot of change in the quantity demanded with the change in the price then it is called the elastic demand whereas when there is no much change in the quantity demanded with the change in the prices then it is called the inelastic demand.
- There are certain exceptions of the law of demand which include war, depression, demonstration effect, Giffen paradox, speculation, ignorance effect, and necessities of life.
- Along with the exceptions, there are certain assumptions of the law of demand without which the concept of law of demand would not hold true. These assumptions are
- No change in consumer’s tastes and preferences.
- No change in the prices of the other products.
- No change in the size of the population.
- No expectation for the change in the prices in the future.
- Consumer income remains constant.
- No substitute for the product is there.
- Consumer habits should remain the same and should not change.
Thus it can be concluded that when the other things are the market are being equal then the per unit quantity demanded of the product will be greater when there is a reduction in the prices of that commodity whereas per unit quantity demanded of the product will be less when there is an increase in the prices of that commodity. There are certain exceptions to the law of demand and there are certain assumptions of the law of demand. In the case of exceptional situations, the law of demand will not work. similarly, if there is any change in the assumption then also the law of demand will not work. However, the limitations or the exceptions of the law of demand do not falsify general law which must operate.
This has been a guide to what is the law of demand and it’s a definition. Here we discuss the example of the law of demand in economics along with advantages and disadvantages. You can learn more about economics from the following articles –