Law of Demand

The law of demand describes the relationship between the quantity demanded and the price of a product.
It states that the demand for a product decreases with increase in its per unit price and vice versa, while
other factors are at constant ( income, price of related good, environment, etc.)
Therefore, there is an inverse relationship between the price and quantity demanded of a product.
Some of the definitions of law of demand given by different authors are as follows:
According to Robertson, “Other things being equal, the lower the price at which a thing is offered, the more a
man will be prepared to buy it.”
In the words of Marshall, “The greater the amount to be sold, the smaller must be the price at which it is offered
in order that it may find purchasers; or in other words, the amount demanded increases with a fall in price and
diminishes with a rise in price.”
According to Ferguson, “Law of Demand, the quantity demanded varies inversely with price.”
Demand/ quantity demanded is a dependent variable, while price is an independent variable.
Therefore, demand is a function of price and can be expressed as follows:
D = f(P)
Where
D= Demand/ quantity demanded

P= Price/ price per unit

f = Functional Relationship

In the law of demand, other factors of demand (except price) should be kept constant as the demand is subject
to various influences. If all the factors would be allowed to vary at the same time, this may counteract the law.
The law of demand can be understood with the help of certain concepts, such as demand schedule, demand
curve, and demand function.
Demand Schedule:
Demand schedule refers to a tabular
representation of the relationship between price
and quantity demanded. It demonstrates the
quantity of a product demanded by an individual or a
group of individuals (market) at specified price and
time.
Demand schedule can be categorized into two types,
which are shown in Figure-2:
The two types of demand schedules (as shown in
Figure-2) are explained as follows:

i. Individual Demand Schedule:

Refers to a tabular representation of quantity of products demanded by an individual at different prices and time.

Table-1 shows the individual demand schedule of product a purchased by Mr. R:

Following are the characteristics of individual demand schedule:
a. Demonstrates the effect of changing price on the buying behavior of customers rather than change in the
demand for a product

b. Expresses the disparity in demand with the difference in the product’s price

c. Represents that at higher prices the quantity demanded reduces and vice versa

ii. Market Demand Schedule:

Shows a tabular representation of quantity demanded in aggregate by individuals at different prices and time.
Therefore, it demonstrates the demand of a product in the market at different prices. The market demand
schedule can be derived by aggregating the individual demand schedules.

Table-2 represents the market demand schedule prepared through the individual demand schedule of three
individuals:
Market demand schedule also demonstrates an inverse relation between the quantity demanded and price of a
product.
Demand Curve:
Demand curve shows a graphical representation of
demand schedule. It can be made by plotting price
and quantity demanded on a graph. In demand curve,
price is represented on Y-axis, while quantity
demanded is represented on X-axis on the graph.
R.G Lipsey has defined demand curve as “the curve
which shows the relationship between the price of a
commodity and the amount of that commodity the
consumer wishes to purchase is called Demand
Curve.”
Demand curve can be of two types, namely,
individual demand curve and market demand curve.
Individual demand curve is the graphical
representation of individual demand schedule, while
market demand curve is the representation of market
demand schedule.
Figure-3 shows the individual demand curve for the
individual demand schedule (represented in Table-1):
In Figure-3 points a, b, c, d, and e demonstrates the relationship between price and quantity demanded at
different price levels. By joining these points, we have obtained a curve, DD, which is termed as the individual
demand curve. The slope of an individual demand curve is downward from left to right that indicates the inverse
relationship of demand with price. Let us understand the individual demand curve with the help of an example.
Prepare a demand curve for the individual demand schedule of product X.
Solution:
The individual demand curve for the demand schedule of X
(represented in Table-3) is shown in Figure-4:
In Figure-4, the DD curve represents the individual demand
curve of product X.

Market demand curve can be obtained by adding market

demand schedules. Figure-5 shows the market demand
curve for the individual demand schedules (represented in
Table-2):
The market demand curve also represents an inverse
relationship between the quantity demanded and price of a
product. Let us understand the market demand curve with
the help of an example.
Example-2:R, S, H, and G are the four consumers of
product P. The individual demand schedules for product P
by the four consumers at different price levels is
represented in Table-4: Determine the market demand
curve for product P and prepare a market demand curve
for product P.
Solution:
The market demand for product P can be determined by
adding the individual demand schedules, as shown in
Table-5:
The market demand curve for product P is shown in
Figure-6:
In Figure-6, the DD curve represents the demand curve
of product P.
Demand Function:
A function can be defined as a mathematical expression that states a relationship between two or more variables
containing cause and effect relationship. Similarly, demand function refers to the relationship between the quantity
demanded (dependent variable) and the determinants of demand for a product (independent variables). In other
words, demand function states the influence of various factors of demand, such as price, customer’s income and
habits, and standard of living, on the demand of a product.
In the short run, the demand function states the relationship between the aggregate demand of a product and the
price of the product, while keeping other determinants of demand at constant.
In such a case, the demand function can be expressed as follows:
Dx = f (Px)

Where, Dx= dependent variable: quantity demanded

Px = independent variable: price per unit

It can be interpreted from the preceding equation that quantity demanded (Dx) is the function of price (Px) for
product X. This states that if there is any change in the price of product X, then the demand of product X would also
show changes. However, the demand function does not interpret the amount of change produced in demand due to
change in the price of the commodity.
Therefore, to understand the quantitative relationship between demand and price of a commodity, we use the
following equation:

Dx = a – b (Px)

Where a = constant (represents total demand at zero price)

b = ∆D/∆P (constant, which represents the change in Dx produced by Px)

On the other hand, in the long run, demand function shows a relationship between the aggregate demand of a
product and a number of determinants of demand, such as price, consumer’s income, standard of living, and
price of substitutes.
Example-3:
XYZ Organization has launched product D at the price of Rs. 20 per unit. With the increasing demand of
product D, its price has reached to Rs. 25. The change in demand for the product is noticed to be 10 per week.
After that, the price continuously with the increase in demand at the same rate and has reached to Rs. 35.
Determine the following for product D (taking a = 100):

i. Demand Function Equation

ii. Demand Schedule

iii. Demand Curve

Solution:

i. The demand function for product D can be expressed as follows:

DD= a – b (Pd)

Where, a = 100

b = ∆D/∆P

b= 10/5

b=2

Therefore, the demand function would be:

DD= 100 – 2 (PD)

ii. The demand schedule for product D is shown in Table-7:

ii. The demand schedule for product D is shown in iii. The demand curve for product D is shown in
Table-7: Figure-9:
Assumptions in Law of Demand:
The law of demand studies the change in demand with relation to change in price. In other words, the main
assumption of law of demand is that it studies the effect of price on demand of a product, while keeping other
determinants of demand at constant.
However there are certain assumptions underlying the law of demand, which are as follows:
i. Assumes that the consumer’s income remains same. If the income of an individual increases, the demand
for products by him/her also increases, which is against the law of demand. Therefore, the income of
consumer should not change.
ii. Assumes that the preferences of consumer remain same.
iii. Considers that the fashion does not show any changes, because if fashion changes, then people would not
purchase the products that are out of fashion.
iv. Assumes that there would be no change in the age structure, size, and sex ratio of population. This is
because if population size increases, then the number of buyers increases, which, in turn, affect the demand
for a product directly.
v. Restricts the innovation and new varieties of products in the market, which can affect the demand for the
existing product.
vi. Restricts changes in the distribution of income.
vii. Avoids any type of change fiscal policies of the government of a nation, which reduces the effect
of taxation on the demand of product.
 Shifts in Demand
From our earlier discussion we know that price is not the sole determinant of the amount of the
commodity consumers wish to purchase. Obviously, the amount of carrot or number of motor cars consu­
mers wish to purchase during a given period de­pends on other variables, including income, the price of
related goods and so on.
In other words, changes in these other variables could cause chang­es in the quantity demanded at each
price, i.e., they change (shift) the demand curve to a new po­sition. We refer to these other variables as
the de­terminants of demand since they determine exactly where the demand function will be located.
As we noted earlier when we plot a demand curve like the one in Figure 6.1, we make the as­sumption that all
other things remain unchanged during the period under consideration.
The other things are:
(1) Buyers incomes (and the pattern of in­come distribution among buyers),
(2) The prices of related goods (i.e., substitutes and complements),
(3) Price expectations, and
(4) Tastes etc..
Change in any other variable will cause change in demand. Demand is said to increase or decrease only if
one (or more) of the determinants of demand changes. For example, if incomes of consumers in­crease and
they wish to buy a larger quantity of a good at each price than they did before, the de­mand for the good is
said to have increased.
That is, consumers demand more at each price in the list of prices. If the change in income causes
consumers to demand less of the good than before at each price then demand is said to have decreased.
This happens in case of inferior goods.
Thus, in any discussion of the principles of sup­ply and demand it is customary to distinguish between:

(1) Changes in quantity demanded of a commodity due to a change in its own price, and

(2) Changes (shifts) in demand due to changes in one or more of the determinants of demand (e.g., in­come).

Figure 6.2 might make this difference clear.

In Figure 6.2, the original demand curve is giv­en by
D0D’0. Given this demand curve, at a price of Rs. 12
the quantity demanded by all consumers is 2,100
units. If price falls from Rs. 12 to Rs. 8, the quantity
demanded will increase to 2,500 units. Changes in
quantity demanded are caused only by changes in
the price of the product itself and are re­flected in
movements along the same demand curve.

Now, starting from the same demand curve D0D’0,

we may consider a change in demand. Let us
suppose that income falls and the commodity under
consideration is a normal good. Consumers will
now demand less of the commodity at each
price. The demand for the product will fall as is
illustrated by the leftward shift of the demand curve
from D0D’0 to D1D’1 in Figure 6.2.
At each price, quantity demanded is less than before, e.g., at a price of Rs. 12 per unit the quantity demanded is
now 1,000 units. In this example, the fall in the amount consu­mers are willing and able to purchase (from 2,500
to 1,000 at a price of Rs. 12 per unit) is the result of a change in demand.
By contrast, an increase in de­mand would be as illustrated by the rightward shift of the demand curve from
D0D’0 to D2D’2 in Figure 6.2.
In either case, changes in demand are caused by changes in one or more of the determi­nants of demand
(income, prices of related goods, price expectations, and taste). Changes in demand are shown in shifts of
the demand curve, either to the right (for an increase in demand) or the left (for a decrease in demand).
We may now have a more specific look at the effect of changes in the various determinants of de­mand, starting
with income. We have just noted that an increase in income causes consumers to de­mand more of the good at
every price, provided the good is a normal good. If the good is inferior, consu­mers will demand less of the good
at every price af­ter an increase in income.

Thus, an increase in in­come increases the demand (shifts the curve rightward) for a normal good but decreases
the de­mand (shifts the curve leftward) for an inferior good. The converse is also true; a decrease in income will
decrease (increase) the demand for a normal (an inferior) good.

If goods A and B are substitutes, an increase in the price of good B will cause an increase in the de­mand for A.
For example, if the price of Fiat Car increases by Rs. 5,000, we would expect consumers to demand more
Ambassador cars for each relevant price. If two goods are substitutes, an increase (de­crease) in the price of
one will cause the demand for the other to increase (decrease).
On the contrary, if two goods are complements, an increase in the price of one good will decrease the demand
for the other. For example, since bread and butter and usually consumed together, they may be treated as
complements.
If the price of but­ter rises, consumers are likely to demand less bread at each price, because the good used
with bread is now more expensive. In case of two complementary goods the price of one good rises (falls), we
would expect the demand for the other to decrease (in­crease).
Consumer demand is also affected by price ex­pectations, i.e., expectations regarding future pric­es. Thus
when the price of a good is expected to in­crease (decrease) in the future, the demand for the good in the
current period will increase (decrease).
For example, widespread consumer expectation that prices of VCRs will fall in near future will cause some
consumers to postpone purchasing a VCR and, therefore, cause a decrease in the current de­mand for VCRs.
It is extremely difficult to quantify tastes. We can only say that if something causes consumer’s tastes to
change toward (away from) a particular good, the demand for that good will in­crease (decrease). For example,
if consumers gradu­ally develop a taste for coffee the market demand for tea will fall.
In Table 6.2, we summaries the effects of select­ed changes on the market demand for a good say, x. The
basic point to note is that the demand schedule or curve for good x is not changed or shifted by a change in its
own price. The demand curve for good x is changed or shifted in response to change in any variable other
than a change in its own price.
 Dear students that’s all for today. If you
have any sort of query of question
regarding this topic feel free to ask me. In
our next class we will discuss another
new topic. Take care. Good bye.