Law of Demand

* Introduction of Law of Demand

* Demand Schedule

* Demand Curve

* Elasticity of Demand

* Measurement of Elasticity

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Introduction of Law of Demand

Demand depends on price. Demand is always at a price. At different prices

different quantitities will be purchased. The law of demand states:

"Demand varies inversely with price not necessarily proportionally, it means

that when price falls demand rises and vice versa.

It can also be stated in these words:

"A rise in the price of a commodity or service is followed by a reduction in

demand and a fall in price is followed by increase in demand if conditions of
demand remain constant."

It can also be written in the words of S.T. Thomas as:

"At any given time the demand for the commodity or service at the prevailing
price is greater than it would be at a higher price and less than it would be at
higher price and less than it would be at lower price."

There are several factors that cause change in demand e.g. changes in
weather, fashion, taste, change in population etc.
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Demand Schedule

Demand schedule is simply a statement in the form of a table given against

each price the quantity of the commodity that will be demanded for a given
period of time.

The individual demand schedule is not of very great importance. It shows only
the demands of an individual. Putting down against price the total quantity of
commodity, which will be disposed off in the market, can prepare the market
demand schedule.

Demand Curve

Demand curve is a geometrical presentation of the demand schedule. Demand

schedule is a table and demand curve is based on this table. Thus one
represents the other. The above schedule can be stated in terms of demand
curve as:
Changes in Demand

According to the law of demand the demand for a product increases due to
change in its price. But there are certain other reasons that influence the
demand. Some of them are as follows:
1. Changes in the Taste and Fashion

The changes in the taste and fashion influence the demand to a great extant.
Actually a human being psychologically want continuous change in his life style
so that he get maximum satisfaction .To achieve his state of satisfaction he
do not consider whatever the price of commodity he has to pay. Even if the
price is high and the commodity is in high fashion or matches exactly his taste
he will ultimately go for purchasing it.
2. Change in climatic conditions

The climatic conditions tend to increase or decrease the demand for a

product. In winter there a great demand for warm clothing and in summer
there a demand for electric fans and cold rinks and the marketers do not
usually charge , less prices in these seasons in order to sell their products.
3. Change in Population

A change in the composition of the population will also affect demand. Influx
of new people will create a demand for the good; they are in the habit of
consuming. If the population of a country is rising, the over all demands of
the people increase even at the same high price.
4. Change in the Amount of Money

Inflation also has a significant bearing on the demands of the people. When
there is inflation it causes a great deal in demand, which leads to an increase
in prices. Similarly if the amount of money is decreased the demand goes down
even if there is no change in its price.
5. Change in Methods of Production

Changes in techniques and in the use of factors will affect the demand pattern
of those factors as in the case of capital equipment and labour or chemicals.
6. Changes in the Price of the Substitutes

If the prices of the substitutes are varied their demand will directly be
affected. If the price of any commodity whose substitute is also available in
the market is decreased its demand will be increased whereas the demand for
its substitute despite of unaltered price will fall down.
7. Changes in the Wealth Distribution

The distribution of wealth also affects the demand for a product. If the
wealth is distributed evenly the goods demanded by people the have acquired
more wealth will increase and demand of the people who have lost wealth will
decrease.
8. Anticipated Political or Price Change

Some time norms and general speculation about tax changes war etc or of
future shortages or abundance causes the present pattern of demand to
change.
9. Changes in Conditions of Trade

The conditions of trade are closely related with the demand of the product.
Demand for every thing is greater in a boom though the prices are rising.
Opposite is the case when there is depression.

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Measurment of Elasticity

The practical purposes, it is not enough to know whether the demand is elastic
or inelastic. It is more useful to find out to what extent it is so. For that
purpose it is essential to measure elasticity.

Three methods are generally used for measurement of elasticity, which are
explained below:
1. Total Outlay Method

In this method, we compare the total outlay of the purchases (or total
revenue from the point of view of the seller) before and after the variations
in the price. It may be expressed as:

Unity: It is unity, when even though the price has changed, the total amount
spent or total revenue remains the same.
Greater than Unity

When with the fall in the price the total amount spent or total revenue
increases on the total amount spent (total revenue) decreases when the price
rise it is said to be greater than unity .
Less than Unity

Elasticity between two prices is considered to be less than unity when the
total amount spent (total revenue) decreases with the rise n the price and
decreases with a fall in the price.

Though this method is dimple it suffers from a serious drawback. It simply

classifies the price elasticity in three categories and does not assist in
measuring it in numerical terms.

2. Proportional Method

In this method we compare the percentage change in price with the

percentage change in demand. The elasticity is the ratio of the percentage
change in the quantity demanded to the percentage change in the price
charged. Its formula is:
Elasticity of Demand = Propotionate Change in amount Demanded /
Propotionate Change in Price

3. Geometrical Method

We can better understand with the help of the figure:

In the figure DD’ is the demanded curve which is a straight line. Here the
demand is represented by the fraction distance from D’ to a point on the
curve divided by the distance from the other to that point. Thus elasticity of
demand on the points P1, P2 and P3 is.

If the curve is not a straight line the above formula can be used by drawing a
tangent at a point where the elasticity is to be measured
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