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Demand and Supply | law of demand and supply
Demand is related to consumption. It represents the process through which a consumer obtains goods and services he wants to consume.
According to Prof. Hibbon, “Demand means the various qualities of goods that would be purchased per time period at different prices in a given market.”
Benham says, “The demand for anything at a given price is the amount of it which will be bought per unit of time at that price.”
Demand is an effective desire which is backed by the willingness to pay and ability to pay.
There are three important things in it:
- Willingness to pay
- Ability to pay
- Price demand – Price demand, other things remaining unchanged, refers to the various quantities of a commodity or service that a consumer would purchase at a given time in a market at various prices.
- Income demand – The income demand, other things remaining unchanged, refers to the various quantities of goods and services which would be purchased by the consumer at various level of income.
- Cross demand – The cross demand, other things remaining constant, refers to the quantities of a good or service which will be purchased with reference to change in price not of this good but of other inter-related goods. These goods are either substitutes or complementary goods.
The Law of Demand –
The Law of demand goods simply expresses the relation between the quantity of a commodity demanded and its price. In Marshall’s words, “The amount demanded increases with a fall in price and diminishes with a rise in price.”
Prof. Samuelson says, “Law of demand states that people will buy more at lower prices and buy less at higher prices, other things remaining the same.”
Assumptions of the Law:
According to Professor Stigler and Boulding, the main assumptions of the Law are:
- No change in tastes and preferences, fashions of the consumers.
- Consumer’s income, both money, and real income must remain the same.
- The prices of the other commodities related to the commodity in demand should not change.
- Substitutes are not discovered.
- No anticipatory changes in prices.
The Law of demand is represented through demand schedules. They summarise the information on prices and quantities demanded. The demand schedule may be ‘the individual demand schedule’ and the market demand schedule.’
“The individual demand schedule refers to the prices and amount demanded of the commodity by an individual. “Market demand schedule is defined as the quantities of a given commodity which all consumers will buy at all possible prices at a given moment of time.”
The Demands Schedule:
|Price (Rs.)||Amount demanded||Market demand|
Demand Curve: The curve shows the maximum quantities per unit of time that consumers will take at various prices. According to R.G. Lipsey, “This curve which shows the relation between the price of a commodity and the amount of that commodity the consumer wishes to purchase, is called demand curve.”
The demand curve slopes downwards from left to right.
Reasons for the Law of demand or the sloping downwards of the demand curve:
- Law of diminishing the marginal utility
- New consumers
- Income effect
- Substitution effect
- Different uses of the commodity.
Exceptions to or limitations of the Law of demand:
- Giffen goods or a special type of interior goods. Some commodities of consumption which are inferior like bread, broken rice, jawar, The expectation etc. Sir Giffen pointed out that the law of demand does not apply to the interior goods. He could practically show that with a fall in the price of bread its amount demanded is reduced rather than being more than before. This is called ‘Giffen Paradox’. As the price of the bread falls in the market they can purchase the same amount of bread with less money.
- Articles of distinction – Veblen explained that the demand for an article of distinction like diamonds and jewelry is more when their price is high and the demand for articles of distinctions falls with a fall in their prices.
- An expectation of change in price in the future.
- Ignorance on the part of consumers about quality.
Factors affecting demand or causes of changes in demand:
- Price of the commodity
- Income of the consumer
- Price of related goods
- Tastes, preferences, and fashions of the consumers
- Size and composition of the population
- Money supply
- Expectations regarding the future
- Climate and Weather