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THE LAW OF DEMAND WITH ASSUMPTIONS

Law of Demand : Introduction : The law of demand was introduced by Prof. Alfred Marshall in his book, ‘Principles of Economics’, which was published in 1890. The law explains the functional relationship between price and quantity demanded. Statement of the Law : According to Prof. Alfred Marshall, “Other things being equal, higher the price of a commodity, smaller is the quantity demanded and lower the price of a commodity, larger is the quantity demanded.” In other words, other factors remaining constant, if the price of a commodity rises, demand for it falls and when price of a commodity falls demand for the commodity rises. Thus, there is an inverse relationship between price and quantity demanded. Symbolically, the functional relationship between demand and price is expressed as : Dx = f (Px) Where D = Demand for a commodity x = Commodity f = Function Px = Price of a commodity Assumptions : Law of demand is based on the following assumptions : 1) Constant level of income : If the law of demand is to find true operate then, consumers' income should remain constant. If there is a rise in income, people may demand more at a given price. 2) No change in size of population : It is assumed that the size of population remains unchanged. Any change in the size and composition of population of a country affects the total demand for the product. 3) Prices of substitute goods remain constant : It is assumed that the prices of substitutes remain unchanged. Any change in the price of the substitute will affect the demand for the commodity. 4) Prices of complementary goods remain constant : It is assumed that the prices of complementary goods remain unchanged because a change in the price of one good will affect the demand for the other. 5) No expectations about future changes in prices : It is assumed that consumers do not expect any further change in price in the near future. If consumers expect a rise in prices in future, they may demand more in the present even at existing high price. 6) No change in tastes, habits, preferences, fashions etc. : It is assumed that consumers' tastes, habits, preferences, fashions etc. should remain unchanged. Any change in these factors will lead to a change in demand. 7) No change in taxation policy : Taxation policy of the government has a great impact on demand for various goods and services. Therefore, it is assumed that there is no change in the policy of taxation declared by Government. The law of demand is explained with the help of the following demand schedule and diagram. Demand schedule : Table. 3.3 Price of commodity ‘x’ (`) Quantity demanded of commodity ‘x’ (in kgs.) 50 1 40 2 30 3 20 4 10 5 As shown in Table 3.3 when price of commodity ‘x’ is ` 50, quantity demanded is 1 kg. When price falls from ` 50 to ` 40, quantity demanded rises from 1 kg to 2 kgs. Similarly, at price ` 30, quantity demanded is 3 kgs and when price falls from ` 20 to ` 10, quantity demanded rises from 4 kg sto 5 kgs Thus, as the price of a commodity falls, quantity demanded rises and when price of commodity rises, quantity demanded falls. This shows an inverse relationship between price and quantity demanded