Law of demand

Meaning of demand

In economics, demand refers to the quantity of a good or service that

consumers are willing and able to purchase at various prices during a
particular period. It represents the consumer's desire to buy a product
and their ability to pay for it.
Law of demand

The law of demand describes the inverse relationship between the

price of a good or service and the quantity demanded. Generally, as the
price of a product decreases, the quantity demanded tends to increase,
and vice versa, assuming other factors remain constant. This
relationship is often represented graphically as a downward-sloping
demand curve.
When other things are constant when price of goods increases,
demand for goods decrease and fall in price leads to increase in
demand.
Demand schedule and demand curve

According to law of demand , DD curve is always slope left to

right downward
• Diagram explanation from notes
Exceptions of the Law
• Giffen Goods
• A Giffen good is a rare and somewhat counterintuitive economic concept that describes a situation
where an increase in the price of a good leads to an increase in the quantity demanded, contrary to
the law of demand. Named after the Scottish economist Sir Robert Giffen, this phenomenon is based
on specific circumstances and characteristics of certain types of goods.
• The key features of Giffen goods are:
• Inferiority: Giffen goods are considered inferior goods, meaning that they are generally of lower
quality and are associated with lower-income individuals.
• Substitution effect overwhelmed by income effect: When the price of a Giffen good rises, the
substitution effect (the tendency to switch to a cheaper alternative) is overwhelmed by the income
effect. The income effect arises because the price increase for the Giffen good effectively reduces the
real income of consumers, especially those with low incomes.
• Lack of close substitutes: Giffen goods are often goods that do not have readily available substitutes.
This lack of substitutes makes it difficult for consumers to switch to other products even as the price
increases.
Continuation of Giffen Goods

• The classic example often cited in economic literature is the

hypothetical case of the "Giffen paradox" during the Irish Potato
Famine in the 19th century. The story suggests that as the price of
potatoes (a staple food for the poor) rose, people actually increased
their consumption of potatoes because the income effect outweighed
the substitution effect.
• It's important to note that real-world examples of Giffen goods are
rare, and the concept is mainly used as a theoretical curiosity rather
than a common occurrence in everyday markets. The conditions
required for a Giffen good to exist are quite specific and may not be
easily met in modern, diverse economies.
Veblen paradox
The Veblen paradox is a concept in economics named after the American economist Thorstein Veblen. It refers to the idea that the demand for certain goods or
services can increase as their prices rise, which is contrary to the typical law of demand. Unlike Giffen goods, which are considered inferior goods, the Veblen
paradox applies to certain types of goods known as "Veblen goods."

Key characteristics of Veblen goods and the Veblen paradox include:

1. **Status and Conspicuous Consumption:** Veblen goods are associated with social status and conspicuous consumption. Conspicuous consumption is the act
of purchasing goods and services for the primary purpose of displaying one's wealth or social standing.

2. **Positive Relationship between Price and Demand:** In the case of Veblen goods, an increase in the price of the good can lead to an increase in the quantity
demanded. This is because consumers perceive these goods as more desirable or luxurious when their prices are higher.

3. **Demonstration of Affluence:** Consumers may view Veblen goods as status symbols, and the higher price may enhance the perceived prestige associated
with owning or consuming these goods. In such cases, the demand for the goods may be influenced more by the desire to showcase wealth rather than by typical
considerations of utility or affordability.

Common examples of potential Veblen goods include luxury goods like high-end fashion items, designer accessories, expensive watches, and exclusive cars. The
demand for these items can sometimes increase as their prices rise because consumers associate higher prices with greater exclusivity and prestige.

It's important to note that not all luxury goods exhibit Veblen effects, and the relationship between price and demand can vary based on consumer perceptions,
preferences, and cultural factors. The Veblen paradox is more of an observational phenomenon associated with certain types of goods within specific social and
economic contexts.
 Expectation of future prices

The law of demand states that, all else being equal, the quantity demanded of a good or service decreases as its price increases, and vice versa.
However, there are certain exceptions or factors that can lead to deviations from this law. One of these exceptions is the influence of expectations
of future prices on current demand. This concept is often referred to as the "Expectations Theory.“

When consumers expect the price of a good to change in the future, it can affect their current demand. The key idea is that if consumers
anticipate a future increase in the price of a good, they may choose to buy more of that good now to avoid paying a higher price later. Conversely,
if they expect a future decrease in price, they might delay their purchases in anticipation of a better deal.
Here are two scenarios related to expectations of future prices:
- Expected Future Price Increase:
- Impact on Current Demand: Consumers anticipate that the price of a good will rise in the future.
-Effect: This expectation can lead to an increase in current demand as consumers seek to buy the good at the lower present price before the
expected increase.
- Expected Future Price Decrease:
-Impact on Current Demand: consumers expect that the price of a good will fall in the future.
-Effect: This expectation may result in a decrease in current demand as consumers decide to postpone their purchases in anticipation of getting
the good at a lower price later.
- The role of expectations in influencing demand is particularly relevant in markets where consumers have the ability to delay their purchases and
where information about future prices is readily available. For example, in markets with rapidly changing technology, consumers might expect the
prices of electronic devices to decline, leading to a postponement of purchases until a better deal is anticipated.
-It's important to note that the impact of expectations on demand is contingent on consumers having accurate information and making rational
decisions based on those expectations. Additionally, this expectation-driven behavior is just one of several factors that can influence demand and
is not universally applicable to all goods and services.
Change in income
• The law of demand states that, all else being equal, as the price of a good or service decreases, the quantity demanded for that good or service increases, and vice versa.
This relationship between price and quantity demanded is generally true, but there can be exceptions or situations where other factors come into play.

• One such exception is when there is a change in income. While the law of demand focuses on the relationship between price and quantity demanded, changes in income
can influence consumer behavior and lead to exceptions.

• 1. **Normal Goods:**
• - For normal goods, which are goods for which demand increases as consumer incomes rise, a change in income can affect demand even if the price remains constant. As
consumers' incomes increase, they may be willing to buy more of certain goods, regardless of the price.

• 2. **Inferior Goods:**
• - Conversely, for inferior goods, which are goods for which demand decreases as consumer incomes rise, a change in income can also lead to exceptions. As incomes
increase, consumers may shift away from inferior goods in favor of higher-quality alternatives.

• 3. **Luxury Goods:**
• - Luxury goods are those for which demand increases disproportionately as income rises. A significant increase in income can lead to a substantial increase in the quantity
demanded for luxury items, even if their prices remain high.

• 4. **Necessities:**
• - For certain goods that are considered necessities, a change in income might not have a significant impact on demand. This is because these goods are essential, and
people may continue to purchase them regardless of changes in their income.

• 5. **Expectations about Future Income:**

• - Consumer expectations about future income can also influence current demand. If consumers expect their incomes to increase in the future, they may be more willing to
spend now, even if their current income hasn't changed.

• In summary, while the law of demand provides a general guideline for understanding the relationship between price and quantity demanded, changes in income represent
one of the factors that can lead to exceptions or modifications in consumer behavior. It's essential to consider income elasticity and the type of good in question when
analyzing the impact of income changes on demand.
Fear of shortage

• The law of demand states that, all else being equal, as the price of a good or service increases, the quantity
demanded for that good or service decreases, and vice versa. However, fear of shortage can be considered
an exception or a complicating factor that might influence the law of demand.
• In a typical scenario, when the price of a good or service increases, consumers tend to demand less of it.
This is because, at higher prices, consumers may find the good or service less affordable, and they may seek
alternatives or reduce their overall consumption.
• However, when there is a fear of shortage or scarcity, consumers may respond differently. The fear of not
being able to obtain a particular good or service in the future can drive an increase in current demand, even
if the price is rising. In such cases, consumers may be willing to pay higher prices to secure the product
before it becomes scarce.
• This behavior can lead to a situation where demand increases despite an increase in price, seemingly
contradicting the traditional law of demand. The fear of shortage introduces a psychological element that
can override the typical economic response to price changes.
• It's important to note that this exception is based on perceptions and expectations rather than changes in
the actual supply and demand fundamentals. Once the fear of shortage subsides or if the shortage doesn't
materialize, normal demand patterns based on price may resume
Necessary Goods and
Services
Another exception to the law of
demand is necessary or basic goods.
People will continue to buy
necessities such as medicines or
basic staples such as sugar or salt
even if the price increases. The
prices of these products do not affect
their associated demand.

Example : Rise in the price of

cooking oil during pandemic.
Limitations
• While the law of demand is a fundamental concept in economics, it does have its limitations and may not always accurately predict consumer behavior
in every situation. Here are some of the key limitations:
• Assumption of ceteris paribus: The law of demand assumes that all other factors affecting demand remain constant (ceteris paribus). In reality,
numerous factors, such as consumer preferences, income, and the prices of related goods, can change simultaneously, making it challenging to isolate
the impact of price changes alone.
• Not applicable to all goods: The law of demand may not apply uniformly to all types of goods. Some goods may defy the law of demand due to factors
like prestige, fashion, or necessity. Veblen goods, for example, are considered exceptions as their demand may increase with higher prices because of
their status-symbol nature.
• Time factor: The law of demand assumes that changes in price lead to immediate changes in quantity demanded. However, in reality, consumers may
take time to adjust their consumption patterns, especially for durable goods or in the case of long-term contracts.
• Diminishing marginal utility: The law of demand is closely related to the concept of diminishing marginal utility, which suggests that as individuals
consume more units of a good, the additional satisfaction (utility) derived from each additional unit decreases. However, the extent to which
diminishing marginal utility affects demand can vary among individuals and goods.
• Expectations and speculation: Consumer expectations about future changes in prices or incomes can significantly impact current demand. If
consumers anticipate a future price increase, they may increase their current demand, even if it contradicts the law of demand.
• Exceptions like Giffen and Veblen goods: Some goods, such as Giffen goods, may see an increase in demand as prices rise due to income effects
overpowering substitution effects. Veblen goods, on the other hand, are associated with higher demand as their prices increase, driven by the desire
for conspicuous consumption.
• Social and cultural factors: Cultural and social factors can influence consumer behavior in ways that may not align with the law of demand. For
instance, certain cultural practices or social trends may drive people to buy specific goods despite price increases.
• In summary, while the law of demand provides a useful framework for understanding consumer behavior, it is important to recognize its limitations and
consider additional factors that can influence demand in specific situations.