Economics

Theory of Demand and Law of Demand

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In this article we will study Theory of Demand and Law of Demand. we will discuss about Market Demand, meaning of demand, relation of demand  and price and also discuss about factors which affect market demand.

In economics,Demand refers to  the desire of the people to buy a commodity backed by willingness and ability to purchase  at certain price. The relationship of price and demand is inverse, it means if price of the commodity increases demand will decrease and vice-versa.

Theory of Demand and Law of Demand

Factors affecting Demand :

  1. Price – Price of the commodity also  affecting market demand because if price increases demand decreases and vice-versa.
  2. Consumers Income – There is direct relationship between income and demand.When income of the consumer increases  demand of the commodity also increases  and vice-versa.
  3. Price of related goods –                                                                                          * In case of substitute goods,demand of a commodity increases with increase in price or vice-versa.                                                                                        In case of complementary goods,demand of a commodity increases when price falls.
  4. Taste and Preference –  Demand of a commodity also affected by the change in taste and preference of consumer.
  5. Income distribution – If income is distributed equally, quantity demanded will increases and vice-versa.
  6. Size of population – If the size of population is greater  market demand of a commodity is also higher and vice-versa.

Also Read:  Difference between Capital Market and Money Market with its comparison chart

Law of DEMAND  :

According to the market demand, this law state that other things remains same or constant, if the price of goods and services increases the demand of a commodity started decline or vice-versa.

In equation form  D = f (p)

Where,     D = Demand of a commodity.                                                                                           F = Function.                                                                                                                       P = Price.

  1. Alfred Marshal says that the amount demanded increase with a fall in price, diminishes with a rise in price.
  2. C.E. Ferguson says that according to law of demand, the quantity demanded varies inversely with price.

Assumptions of Law of Demand :

  1. No change in income.
  2. No change in price of related goods.
  3. No change in taste and preference of the consumer.
  4. Use of normal goods.
  5. The size of population remains the same.

Explanation of Law :

Law of demand shows , there is a inverse relationship between price and quantity demanded of a commodity. It means if price of commodity increases its demand will falls and vice-versa.This can be explained with the help of following schedule :

      Price                   Quantity demanded
           5              100
           4              200
           3              300
           2              400

This schedule shows , when price of the commodity falls its quantity demanded increases and vice-versa.

Diagram of Law of demand according to schedule :

 

Theory of Demand and Law of Demand

The Demand curve slopes downward from left to right, it means when price is 5 demand is 100, then price falls down to 4 and its quantity demanded increases from 100 to 200, so demand curve shows inverse relationship between price and demand of a commodity.

 

So we have studied Theory of Demand and Law of Demand. we discussed about Market Demand, meaning of demand, relation of demand  and price and also discuss about factors which affect market demand.

If you have any query Please let us know in the comments section .

 

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