Law of Demand

Enlarge Image Economics is a study that deals with the production, distribution and consumption of goods and services. Here, the study of pattern of demand and supply, and the two's relationship with the prices becomes very important. One very crucial principle of economics is the one that describes the relationship between demand, supply and prices of a commodity or a service, and is known as the law of demand. More on the same follows below.

Law of Demand Explained

Statement: 'All other factors being constant, a rise in price for a good or a service will result in drop in demand of that commodity and vice versa.'

Similarly, when there is drop in its prices, the demand for a good or service rise. Many economists interpret the law of demand in a different sense. Economists also bring in the aspect of supply and relate it to the costs and call it the law of demand and supply. This law lays down a very simple relation that works similar to the relationship described in the law of demand, but in a different direction. The law states that if the price of a product or a service rises, there is a corresponding rise in its supply.

Now, take a close look at the graph shown. Relating it to the definitions above, you can easily understand the graphical representation of this law, which is known as the law of demand curve or simply the demand curve.

An Example

For better understanding, nothing better than a practical, real life example. Let's consider the delicious pizza, for instance. You as a consumer will obviously purchase more number of pizzas, if there is a fall in pizza prices. Now, consider the opposite, which is equally true. If there is a rise in price of pizza, a consumer will try to cut down on his expenses by eating less pizzas. Consider the following table:

Price of a Pizza	Quantity Purchased
$2.00	10
$2.25	9
$2.50	7
$2.75	5
$3.00	4

As a consumer you might clearly correlate with the fact illustrated in the table presented above. You can clearly see how the price demand pattern follows the law of demand curve.

Exceptions

Even though the law of demand holds good in most cases, there are a few exceptional cases when this law does not hold true. Here are some of these exceptions:

Giffen Goods: These types of commodities include extremely necessary items without which a consumer cannot sustain normal living. For example, staple food items like potatoes, bajra, barley, etc. which are consumed mostly by poorer families do not follow this law. If there is rise in price of these, a poor household has no option but to continue purchasing it. This results in no drop in demand and hence this case is an exception.

Natural Disaster: This is a special condition in which the consumer value of necessary goods like staple food items, water, medicines, etc. do not follow the law of demand. During floods, hurricanes, earthquakes, etc. even goods with high prices have high demand as the people just cannot do without these goods in troubled conditions.

Goods of Status Symbol: There are some commodities or services which are considered as a sign of elevated status by those who possess them. For example, air-conditioned cars, jewelry, etc. are some commodities which are used to showcase one's wealth.

Anticipating Price Rise: If the price of a commodity is already high and a household expects another price rise in near future, they may decide to stock it up and increase the buying of this good at the current high price, which makes up for another exception in case of this law.

Rise in Income: If a price rise is accompanied by a rise in income, a household may not mind buying the same product for a heightened rate. This again violates the law of demand as the quantity does not change despite a rise in price.

This is where we sum up the article on this interesting law. This is one of the most important but easy to digest concept in economic studies and a proper understanding can prove handy in managing your household budget.