Law of Demand with Schedule and curve

Alfred Marshall stated that ' the greater the amount 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 rise in price'.
Law of Demand
The law of demand states that there is a negative or inverse relationship between
the price and quantity demanded of a commodity over a period of time.
Definition: Alfred Marshall stated that ' the greater the amount 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 rise in price'.
According to Ferguson, the law of demand is that the quantity demanded varies
inversely with price.
Thus the law of demand states that people will buy more at lower prices and buy
less at higher prices, other things remaining the same. By other things remaining the
same, we mean the following assumptions.
Assumptions of the Law
1.        No change in the consumer's income
2.        No change in consumer's tastes and preferences
3.        No changes in the prices of other goods
4.        No new substitutes for the goods have been discovered
5.        People do not feel that the present fall in price is a prelude to a further decline in
price.
Demand Schedule
Demand schedule is a tabular statement showing how much of a commodity is
demanded at different prices.
Demand Schedule and Demand curve
Table is a hypothetical demand schedule of an individual consumer. It shows a list
of prices and corresponding quantities demanded by an individual consumer. This is an
individual demand schedule.
 Table : Demand Schedule
Price           Quantity Demanded
(Rs)             (Units)
5                 10
4                 20
3                 30
2                 40
1                 50

Demand Curve

The demand schedule can be converted into a demand curve by measuring price
on vertical axis and quantity on horizontal axis as shown in Figure.
In Figure, DD1 is the demand curve. The curve slopes downwards from left to right
showing that, when price rises, less is demanded and vice versa. Thus the demand
curve represents the inverse relationship between the price and quantity demanded,
other things remaining constant.
Individual demand and market demand schedules
Individual demand schedule tells the quantities demanded by an individual
consumer at different prices.
Individual demand schedule for oranges
  
Price of oranges (Rs.)       Quantity of oranges
   
5  1
4  2
3  3
2  4
1  5
It is clear from the schedule that when the price of orange is Rs.5/ - the consumer
demands just one orange. When the price falls to Rs.4 he demands 2 oranges. When
the price fals further to Rs 3, he demands 3 oranges. Thus, when the price of a
commodity falls, the demand for that commodity increases and vice versa.
Market demand schedule
A demand schedule for a market can be constructed by adding up demand
schedules of the individual consumers in the market. Suppose that the market for
oranges consists of 2 consumers. The market demand is calculated as follows.
 
Table  Demand Schedule for two consumers and the Market Demand
Schedule
Price of Oranges           Quantity demanded
          Consumer I                   Consumer II        Market Demand
                                     
                                     
5        1                 -        1
4        2                 1        3
3        3                 2        5
2        4                 3        7
1        5                 4        9
Market demand curve
The market demand also increases with a fall in price and vice versa.
 In Figure, the quantity demanded by consumer I and consumer II are measured on
the horizontal axis and the market price is measured on the vertical axis. The total
demand of these two consumers i.e. D1 + D2 = DDM. - DDM - the market demand
curve - also slopes downwards just like the individual demand curve. Like normal
demand curvs, it is convex to the origin. This reveals the inverse relationship.
Important Facts about Law of Demand:

1. Inverse Relationship:
It states the inverse relationship between price and quantity demanded. It simply affirms
that an increase in price will tend to reduce the quantity demanded and a fall in price will
lead to an increase in the quantity demanded.
2. Qualitative, not Quantitative:
It makes a qualitative statement only, i.e. it indicates the direction of change in the
amount demanded and does not indicate the magnitude of change.
3. No Proportional Relationship:
It does not establish any proportional relationship between change in price and the
resultant change in demand. If the price rises by 10%, quantity demanded may fall by
any proportion.
4. One-Sided:
Law of demand is one sided as it only explains the effect of change in price on the
quantity demanded. It states nothing about the effect of change in quantity demanded
on the price of the commodity.
Reasons for Law of Demand:
Let us now try to understand, why does the law of demand operate, i.e. why does a
consumer buy more at lower price than at a higher price.
The various reasons for operation of Law of Demand are:
1. Law of Diminishing Marginal Utility:
Law of diminishing marginal utility states that as we consume more and more units of a
commodity, the utility derived from each successive unit goes on decreasing. So,
demand for a commodity depends on its utility.
If the consumer gets more satisfaction, he will pay more. As a result, consumer will not
be prepared to pay the same price for additional units of the commodity. The consumer
will buy more units of the commodity only when the price falls.
Law of diminishing marginal utility is considered as the basic reason for operation of
‘Law of Demand’.
2. Substitution Effect:
Substitution effect refers to substituting one commodity in place of other when it
becomes relatively cheaper. When price of the given commodity falls, it becomes
relatively cheaper as compared to its substitute (assuming no change in price of
substitute). As a result, demand for the given commodity rises.
For example, if price of given commodity (say, Pepsi) falls, with no change in price of its
substitute (say, Coke), then Pepsi will become relatively cheaper and will be substituted
for coke, i.e. demand for Pepsi will rise.
3. Income Effect:
Income effect refers to effect on demand when real income of the consumer changes
due to change in price of the given commodity. When price of the given commodity falls,
it increases the purchasing power (real income) of the consumer. As a result, he can
purchase more of the given commodity with the same money income.
For example, suppose Isha buys 4 chocolates @ Rs. 10 each with her pocket money of
Rs. 40. If price of chocolate falls to Rs. 8 each, then with the same money income, Isha
can buy 5 chocolates due to an increase in her real income.
‘Price Effect’ is the combined effect of Income Effect and Substitution Effect.
Symbolically: Price Effect = income Effect + Substitution Effect. For a detailed
discussion on Income Effect and Substitution Effect, refer Power Booster.
4. Additional Customers:
When price of a commodity falls, many new consumers, who were not in a position to
buy it earlier due to its high price, starts purchasing it. In addition to new customers, old
consumers of the commodity start demanding more due to its reduced price.
For example, if price of ice-cream family pack falls from Rs. 100 to Rs. 50 per pack,
then many consumers who were not in a position to afford the ice-cream earlier can
now buy it with decrease in its price. Moreover, the old customers of ice-cream can now
consume more. As a result, its total demand increases.
5. Different Uses:
Some commodities like milk, electricity, etc. have several uses, some of which are more
important than the others. When price of such a good (say, milk) increases, its uses get
restricted to the most important purpose (say, drinking) and demand for less important
uses (like cheese, butter, etc.) gets reduced. However, when the price of such a
commodity decreases, the commodity is put to all its uses, whether important or not.
Exceptions to Law of Demand:

As a general rule, demand curve slopes downwards, showing the inverse relationship
between price and quantity demanded. However, in certain special circumstances, the
reverse may occur, i.e. a rise in price may increase the demand. These circumstances
are known as ‘Exceptions to the Law of Demand’.
Some of the Important Exceptions are:
1. Giffen Goods:
These are special kind of inferior goods on which the consumer spends a large part of
his income and their demand rises with an increase in price and demand falls with
decrease in price. For example, in our country, it is often seen that when price of coarse
cereals like jowar and bajra falls, the consumers have a tendency to spend less on them
and shift over to superior cereals like wheat and rice. This phenomenon, popularly
known as’ Giffen’s Paradox’ was first observed by Sir Robert Giffen
2. Status Symbol Goods or Goods of Ostentation:
The exception relates to certain prestige goods which are used as status symbols. For
example, diamonds, gold, antique paintings, etc. are bought due to the prestige they
confer upon the possessor. These are wanted by the rich persons for prestige and
distinction. The higher the price, the higher will be the demand for such goods.
3. Fear of Shortage:
If the consumers expect a shortage or scarcity of a particular commodity in the near
future, then they would start buying more and more of that commodity in the current
period even if their prices are rising. The consumers demand more due to fear of further
rise in prices. For example, during emergencies like war, famines, etc., consumers
demand goods even at higher prices due to fear of shortage and general insecurity.
4. Ignorance:
Consumers may buy more of a commodity at a higher price when they are ignorant of
the prevailing prices of the commodity in the market.
5. Fashion related goods:
Goods related to fashion do not follow the law of demand and their demand increases
even with a rise in their prices. For example, if any particular type of dress is in fashion,
then demand for such dress will increase even if its price is rising.
6. Necessities of Life:
Another exception occurs in the use of such commodities, which become necessities of
life due to their constant use. For example, commodities like rice, wheat, salt,
medicines, etc. are purchased even if their prices increase.
7. Change in Weather:
With change in season/weather, demand for certain commodities also changes,
irrespective of any change in their prices. For example, demand for umbrellas increases
in rainy season even with an increase in their prices. It must be noted that in normal
conditions and considering the given assumptions, ‘Law of Demand’ is universally
applicable.

Shifts in demand or Increase and decrease in demand

One of the basic assumptions of economic theory is 'other things being equal'.
Other things are income, tastes, population, government policy, technology, price of
related goods etc. Change in such factors will bring about increase or decrease in
demand. In figure, the increase in demand is shown by the shifts of the demand curve
to the right from DD to D2 D2. The decrease in demand is shown by the shift to the left
from DD to D1 D1. The increase and decrease in demand are shifts in the demand
curves.
example, poor people spend the major part of their income on coarse grains (e.g.
ragi, cholam ) and only a small part on rice. When the price of coarse grains rises, they
will buy less rice. To fill up the resulting gap, more of coarse grains have to be
purchased. Thus, rise in the price of coarse grains results in the increase in quantity of
coarse grains purchased. This is called 'Giffen Paradox'. In these cases, the law of
demand has an exception.
Factors determining demand
1. Tastes and preferences of the consumer
Demand for a commodity may change due to a change in tastes, preferences and
fashion. For example, the demand for dhoties has come down and demand for trouser
cloth and jeans has gone up due to change in fashion.
2. Income of the consumer
When the income of the consumer increases, more will be demanded. Therefore,
we can say that as income increases, other things being equal, the demand for a
commodity also increases. Comforts and luxuries belong to this category.
3. Price of substitutes
Some goods can be substituted for other goods. For example, tea and coffee are
substitutes. If the price of coffee increases while the price of tea remains the same,
there will be increase in the demand for tea and decrease in the demand for coffee. The
demand for substitutes moves in the opposite direction.
4. Number of consumers
Size of population of a country is an important determinant of demand. For
instance, larger the population, more will be the demand, for certain goods like food
grains, and pulses etc. When the number of consumers increases, there will be greater
demand for goods.
5. Expectation of future price change
If the consumer believes that the price of a commodity will rise in the future, he may
buy a larger quantity in the present. Suppose he expects the price to fall, he may defer
some of his purchases to a future date.
6. Distribution of income
Distribution of income affects consumption pattern and hence the demand for various
goods. If the government attempts redistribution of income to make it equitable, the
demand for luxuries will decline and the demand for necessities of life will increase.
7. Climate and weather conditions
Demand for a commodity may change due to a change in climatic conditions. For
example, during summer, demand for cool drinks, cotton clothes and air conditioners
will increase. In winter, demand for woollen clothes increases.
8. State of business
During boom, demand will expand and during depression demand will contract.
9. Consumer Innovativeness
When the price of wheat flour or price of electricity falls, the consumer identifies
new uses for the product. It creates new demand for the product.