Law of Demand

1st year POE - Principles of Economics Notes

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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