Economics notes by Milan Gajurel for students of Shree Sahid Jagat Prakash Jung Shah Sanskrit Secondary School

1. Explain and illustrate the law of demand. What are its exceptions?
 Law of Demand states that, there is the negative relationship between price of commodity and its
quantity demanded. This law was developed by an economist Alfred Marshall to explain the relationship
between price and quantity demanded of any product. He states that, “Other things remaining same the
quantity demanded increases with the fall in price and vice versa."
Assumptions :
The law of demand is based on the following assumptions
a. No change in the income of the consumer.
b. No change in price of related goods.
c. No change in taste, preferences fashion of the consumer.
d. No change in size of population.
e. No change in season & climate.

The law can be explained by the following table and graph.

Price(Rs Quantity Demanded
)
5 3
10 2
15 1

The above table shows that there is an inverse relationship between price of commodity and its quantity
demand. At the rupees 5 the quantity demand of commodity is 3 units. On increasing the price from Rs 10 to
15, the quantity demanded decreases from 2 to 1 unit which can be shown by following graph.

In the above figure, quantity demand of commodity and its price are measured/plotted in x-axis and y-axis
respectively. The demand curve DD’ is formed by the combination of different points a, b, and c. The
demand curve DD’ shows an inverse relationship between price and quantity demand of commodity as it is
downward slopping.

Exceptions / Limitations of law of Demand

The exception or limitations of law of demand can be explained as below:
a. Basis or necessary or neutral goods
The law of demand is not applicable in the case of basic or necessary goods like salt, medicines, water, etc.
The demand for such goods remains unchanged for all levels of price. This is against you law of demand.
b. Prestigious goods
Prestigious goods are those goods which are related to the prestige of consumers such as gold, silver,
precious stones, rare paintings etc. So, demand for Such goods increase even the price of such goods
increases as they offer prestige to the consumers. It is also against the law of demand.

c. Change in taste and preferences

Economics notes by Milan Gajurel for students of Shree Sahid Jagat Prakash Jung Shah Sanskrit Secondary School

If the consumers tastes and preference are changes in favour of all particular goods, then demand for such
goods increases even at the same price or the consumer will be ready to pay even higher price to purchase
the same quantity of goods. For eg, the demand for a cone of ice-cream increases in the summer even at
higher price.

d. Ignorance of consumer
If the consumer is not aware of the competitive price of the same commodity, he purchases mare of the
commodity even at higher price. It is because high place commodity are generally considered as superior in
quality. Such attitude and ignorance of consumer makes the law of demand ineffective.

e. Price of shortage of expectations.

If the consumer feels that there is going to be the shortage of a commodity in near future or price is going to
be rise then they demand more goods & services at present paying higher prices due to the fear of further
rising price. It is also against the law of demand.

2. Explain and illustrate the law of supply. What are its exceptions?
 Law of supply shows the positive relationships between the price and quantity supplied of good and
services. This law states that, “Other things remaining same, the quantity supplied increases with the rise in
price and vice-versa.”

Assumptions :
This law is based on the following assumption
a. No change in number of firms
b. No change in technology
c. No change in cost of production
d. No change in tax and subsidy policy of the government
e. No change in price expectations

The law of supply can be explained with the help of below table and graph
Price (Rs) Quantity Supply
10 5
20 10
30 15
The above table shows that different combination of price of the commodity and its quantity supplied. On
increasing the price from Rs 10 to 30, the quantity supplied is also increasing from 5 units to 15 units.
Which shows the positive relationship between price and quantity supplied which can be shown by
following graph.
Economics notes by Milan Gajurel for students of Shree Sahid Jagat Prakash Jung Shah Sanskrit Secondary School

In the above figure, the price and the quantity supplied are shown in y-axis and x-axis respectively. SS’ is a
supply curve which obtained by plotting different combinations of price and quantity supplied with point A,
B and C. This shows that the price and quantity supplied has positive relationship which support the law of
supply.
Exception / Limitation of Law of Supply
The exception or limitations of law of supply can be explained as below:
a. Auction sale
The law of supply states that quantity supplied increases with increase in price and vice-versa. But this law
doesn’t hold true in case of auction sale.
b. Perishable goods
Goods which have very short life time and become useless after some time are called perishable gods. Such
goods must be supplied in the market at the night time whatever be it's price.
c. Agricultural goods
The law of supply is isn’t applicable in agriculture goods. The Supplies of such goods are governed by
seasonal factors rather than price
d. Supply of labor
The supply of labor (supplied by laborer) does not follow the law of supply. Anyone supplies labor oat any
market wage trade.
e. At the time of depression
Depression is that situation in the economy in which all the economic activities like production,
employment.

5. Define market equilibrium. Explain the process of determination of market equilibrium.

Demand & supply are the two major Instrument of the market economy. The equality between quantity
demand and quantity supply is known as interaction between demand and supply or market equilibrium. The
price which is determined by the market equilibrium is called equilibrium price and the quantity which is
determined by the market equilibrium is called equilibrium quantity. The concept of market equilibrium can
be explained by the help of below schedule and graph.

The table shows that as price of the commodity falls from Rs. 10 to Rs.8, Rs.6, Rs.4 and Rs.2; the quantity
demanded of a commodity in the market increases from 5 units to 10 units, 15 units, 20 units and 25 units
respectively. While the quantity supplied of a commodity in the market decreases correspondingly from 25
units to 20 units, 15 units, 10 units and 5 units. At price Rs. 6 per unit both the market demand and market
supply are equal at 15 units. This defines market equilibrium at which the equilibrium price so determined is
Rs. 6. The process of determination of the equilibrium price is further explained below.
Economics notes by Milan Gajurel for students of Shree Sahid Jagat Prakash Jung Shah Sanskrit Secondary School

In the figure X-axis represents quantity and Y-axis

represents price per unit of the commodity. DD
is market demand curve and SS is market supply
curve. The market demand curve intersects the
market demand curve at point E, which defines
market equilibrium. This determines equilibrium
price Rs. 6 and equilibrium quantity 15 units.