Demand: law of demand, assumptions, limitations

Explain the demand’s law with the help of schedule’ and diagram?

Desire

In ordinary language demand is considered need or desire for a product. If we need a motor bike, we’ll say that we demand a bike.

Demand

In economics the word demand has a specific meaning. It means only that desire which is supported by money. In our earlier example, only to desire a bike is not called demand in economics until you don’t have sufficient resources to buy it.

DEMAND = Desire to purchase + resources to purchase

So, if a person has money but is not desire to purchase a bike then it is not called demand.

Law of demand

“Other-things kept the same’, when price’ of a commodity increase, its quantity demanded contracts and when price’ of a commodity decreases its quantity demanded extends.

Explanation

Law of demand shows the inverse relation between price and Q d. As

When P-increases’ ----------- Q.d decreases’.

When P-decreases’ ----------- Q.d increases’.

Both price and Qd change in opposite direction showing negative relation.

In Mathematical function form

Q d  =  f (p)

i.e. Quantity demanded is a function of price or Q d depends upon prices. However this relationship proves true only on the basis of certain assumption (fashion, taste, income, weather) discussed later.

price	Q.d
10 20 30 40 50	1000 800 600 400 200

In the schedule, when price is Rs.10, its Q d is 1000 units. As the price increases from 10 to 20, 30, 40 & 50, its Quantity demand goes down 1000 to 800, 600, 400, and 200 respectively.

In the graph DD demand curve shows negative slope as it slopes down-ward from left’ to right’. It is due to the inverse relation between price and Q d.

Factor’s which make the curve’ negatively-sloped

1.     Price-Effect

When price of a good decreases, more consumer purchase more of that good so Q d increases.

2.     Income Effect

When price goes down,  consumer is left with more income so he increases his Q  d of that product.

3.     Substitution-Effect

When price’ of good “A” goes-down, price’ of good “B” seems costly relative to “A”. So consumer-shifts his money’ from ‘B’ to purchase more of ‘A’.

Assumption of the law

1.     Consumer’s income remain same

If consumer’s income changes; law of demand will not hold true. E.g. if income falls, the consumer will naturally buy less quantity even if its price is low.

2.     Habits & Taste Remain Same

Consumer will not develop a new taste or disliking for the product, he buys usually. E.g. if peoples develop a taste for coffee, the tea’s demand will decline.

3.     Fashion Remain Same

At the same time as the fashion of any product changes its price and demand both fall. So the demand’s law becomes false.

4.     Weather  Condition Remain Same

People consider weather conditions more than price. If woolen clothes are expensive, even then their Q d will increase in winter season.

5.     Population Size Remain Same

If the country’s population increases, the demand of different commodities will increase, even prices’ are rising.

6.     Price of Substitute Remain Same

If the price of tea remains same but the price of coffee goes down, the people will decrease the demand for tea. (Substitution effect).

7.     No Change in Future Circumstances

Some time people imagine that the cost of a particular product will increase in the close to future they raise their purchase at the same price’.

8.     Discovery of New Uses

If the new use of a product is discovered then consumer will buy it even at high prices. E.g. Electricity.

9.     Advertisement

It is assumed that the producers will not increase the demand for a good by attractive advertisement.

10.     Distribution of Wealth Remain Same

If there is the same allocation of wealth in a country’s then the demand for luxurious items will decrease and demand for essential requirements will raise.

11.      Changes-in-Trade Conditions

If trade conditions are good, Q d will rise and vice-versa.

Exceptions  /  limitations

1.     Very Expensive Goods

Diamond’s, deluxe-cars, et cetera. are demanded’ by rich people only, so their demand remains same with changes in price.

2.     Very Low-Price Goods (inferior)

In Pakistan salt and pepper are very low priced; if their price will decrease, people will not increase its quantity demand

3.     Price-Increases in future

People will increase the Q d of a product if they know that the price will increase in the future.  (Even if current price is high)

4.     Shortage of a product

If people know about the expected shortage of a product, they purchase it at high price.

5.     Increasing Marginal Utility

If consumer’s satisfaction increases by using more and more units of a commodity then he increases its purchases even at high price.

6.     Ignorance of the Consumer

Usually, consumers don’t care about the prices, so in such case, this law will not operate.

EXCEPTIONAL DEMAND

VEBLEN GOODS OR OSTENTATIOUS GOODS

There are some unusual demand which shows more being demanded as prices rises One type of exceptional demand is Veblen commodities, named after the American economist Thorstein-Veblen. He uses the phrase conspicuous consumption, i.e.people buying expensive goods and services to prove how rich they are. These can also be called ostentatious goods. They are bought in order to impress people. Examples may be designer label cloth, and expensive watches. A fall in their appeal and quantity demanded might fall.

GIFFEN GOODS OR INFERIOR GOODS

Another category of goods with exceptional demand is Giffen goods. These are the named after the Scottish economist Robert Giffen who first describes the inverse relationship which may exist between price and quantity demanded. According to him when the price of some inferior good decreases the purchasing power of consumer increase and now consumer shifts his demand to some other normal goods. In this way by fall I price of Giffen  (inferior) good its quantity demanded also decreases.

Both Veblen goods and Giffen goods have positive sloped demand curve. Which is exceptionally seen in society. Usual demanded curves has negative slope.

Above diagram shows the exceptional demand curve which have positive slope. DD demand curve clearly shows that as the price of good rises P1 to P2 the quantity demanded extends Q1 to Q2 showing Veblen’s ostentatious effect. That people buy more to prove how rich they are.

Why do the changes in demand our?

Explain expansion & contraction and Rise & fall in Demand graphically.

Changes in demand

Demand for any commodity changes due to many reasons like price, Income, taste, weather etc.

We divide the “Demand Changes”. In to two types:

1.     Changes due to price (Expansion & Contraction)

2.     Changes due to non-price factor (Rise & Fall)

A.     EXPANSION AND CONTRACTION IN DEMAND

1.     EXPANSION

When quantity demanded for a good increases due to decrease in price, it is called Expansion in demand.

price	Q.d
15 10 5	1000 2000 3000

The schedule show that when price goes down Q d increases. This increase in Q d is called Expansion in demand.

In the graph, we take the prices on Y-axis and Q d on X-axis. By schedule, the DD demand curve is derived which shows that when price is 15. Q d is 1000 as it falls down to 5. Q d increases up to 3000. Rightward arrow shows Expansion in demand.

2.     CONTRACTION

When quantity demanded for a commodity decreases due to increase in its price, it is called Contraction in demand.

price	Q.d
5 10 15	3000 2000 1000

The Schedule shows the Contraction in demand as when price is 5, Q d is 3000. When price goes to 15, Q d decreases to 1000.

The graph also shows the same upward arrows show that price is increasing. Leftward arrows show that Qd is decreasing. So it shows contraction in demand.

B.   RISE & FALL IN DEMAND

When the price of a commodity remain same but the quantity-demanded changes due to other factors like income, fashion, habits, population, substitutes’ price, etc; then the change in demand is called Rise & fall in demand.

1.        Rise in Demand

When price remain same or price-effect doesn’t affect demand, and quantity demanded increases due to other factors; then is called Rise in demand. It occurs in two ways:

       I.                                                       I.                        When price remain same and quantity demanded rises.

                                        II.                        When price increases and quantity demanded remain same.

 

      I.                                                      I.                        When price is constant and  Q d increases

Price of product remain same but consumers buy more of it, e.g. due to increase in income.

price	Q.d
10 10 10	100 200 300

In the Schedule, price is constant at 10. But Q d increases from 100 to 200 & then 300, showing Rise in demand. In the Graph, the right ward shifting of the demand curve also shows Rise in Q d. when at the price of 10 Q d increases from 100_i  to 200 the demand curve shifts from DD to D₁ D_1, and then to D₂ D_2’ showing Rise in demand.

   II.                                                     I.                        When price increases and Q d remain same.

In this case price increases but Q d doesn’t fall, rather remains same that means indirectly Q d increases.

price	Q.d
10 15 20	200 200 200

In the schedule price increases from 10 to 15 to 20. But Q  d doesn’t fall this increase. It shows that the price change doesn’t affect Q d; people are still purchasing more at high price.

In the graph, first Demand curve is DD then it shifts upwards as D₁ D₁ and again D₂ D₂ showing Rise in quantity demanded.

2.         Fall in Demand

When price remain same but quantity demanded decreases due to the other factors; it is called Fall in demand. It occurs in two ways:

       I.                                                       I.                When price remain same and quantity demanded decreases.

                                        II.                 When price decreases but quantity demanded remain same.

 

      I.                                                      I.             When price remain same and Q. d decreases.

The price of a good is same but Q d for it goes down e.g. due to decrease in population.

price	Q.d
15 10 5	30 20 10

It is obvious from the schedule and Graph that price is constant at 15. But Q d continuously decreasing. So demand Curve shifts leftward in the form of D₁ D₁ and then D₂ D_2’ showing Fall in the quantity demanded.

   II.                                                      I.        When price decreases but quantity demanded remain same.

Price decreases but it doesn’t increase the quantity demanded, it means people buy less of a product even at low price.

price	Q.d
20 15 10	300 300 300

It is obvious from Schedule and Graph that price is decreasing but by this price decrease; Q d will not increase but remain constant at 300. It means people are still buying less. So this shows Fall in demand.

“FREQUENTLY ASKED QUESTIONS”

1.   What is economics?

In economics the word demand has a specific meaning. It means only that desire which is supported by money. In our earlier example, only to desire a bike is not called demand in economics until you don’t have sufficient resources to buy it.

DEMAND = Desire to purchase + resources to purchase

So, if a person has money but is not desire to purchase a bike then it is not called demand.

2.    How we Differentiate the Individual and Market-Demand curve?

Individual’s demand-curve

This type of demand curve shows the need of a person.

INDIVIDUAL’S DEMAND SECHDULED

Price of a egg’s	Quantity demanded
8 7 6 5 4	2 3 4 5 6

 

Market demand curve

Market-demand curve shows the needs of the whole market.

Price of a egg’s	Consumers				Total market demand
	A	B	C	D
8 7 6 5 4	2 3 4 5 6	0 1 2 3 4	1 3 5 7 9	2 4 6 8 10	05 11 17 23 29

3.    Why demand-curve is negatively-sloped?

Demand-curve is negatively-sloped, due to rise in price, quantity demand decrease and vice-versa. Price effect, income effect and substitution effect make the demand curve negatively sloped.