Law Of Demand Definition Example What Is Law Of Demand Economics

Law of Demand Definition

The law of demand is the concept of economics. The prices of the goods or services and their quantity demanded are inversely related when the other factors remain constant. In other words, when the price of any product increases, then its demand will fall, and when its price decreases, its demand will increase in the market.

This happens because of the concept of the diminishing marginal utility which states marginal utilityMarginal UtilityA customer’s marginal utility is the satisfaction or benefit derived from one additional unit of product consumed. It could be calculated by dividing the additional utility by the amount of additional units.read more of the goods or service declines when there is an increase in its available supply, i.e., the consumer uses first units of good purchased to serve their need which they think is most urgent over the less urgent demands in their behavior. So, the economic law of demand works with the law of supply to determine and explain how the resources are being allocated in the market economies and how the prices of the goods and services reused in the day-to-day work are determined.

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Law of Demand (wallstreetmojo.com)

Example of Law of Demand in Economics

Let’s take an example of the Law of demand in economics.

There is a company XYZ ltd. which is selling only one type of goods in the market. Following is the demand schedule of the company showing how much quantity will be demanded of that product at a special price during that day. Explain the relationship between the price and quantity demanded when all the assumptions of the law of demand holds.

According to the law of demand in economics, when the price of any product increases, its demand will fall, and when its price decreases, its demand will increase in the market. In the present case, we can see that when the prices per unit of the quantity of the product sold by company XYZ increase from $ 100 to $ 250, then the quantity demandedQuantity DemandedQuantity demanded is the quantity of a particular commodity at a particular price. It changes with change in price and does not rely on market equilibrium.read more product decreases from 50 units to 35 units. When the prices per unit of the quantity of the product sold by company XYZ increase from $ 250 to $ 5000, then the quantity demanded of the product decreases from 35 units to 25 units and so on.

This shows that commodity prices and their demand are inversely related. Thus, with the increase in the price per unit of the quantity, the demand for its quantity is decreasing, so this is an example of the concept of the law of demand.

Advantages of the Law of Demand in Economics

There are several advantages of the law of demand, providing the opportunity for the traders, consumers, and other related parties. Some of the advantages are as follows:

It helps the party selling the different goods fix the prices of their sold commodities. It will let them know that if they increase or decrease the demand prices, what will be its corresponding effect on the quantity that its customers will demand.The study of the law of demand in economics is of great importance to the finance minister of every country as the change in the rate of tax will change the prices of the different commodities, thereby affecting its demand in the market.

Disadvantages of the Law of Demand

The different limitations and drawbacks of the law of demand in economics include the following:

They do not hold in every situation, such as war, depression, demonstration effect, Giffen paradox, speculation, ignorance effect, and necessities of life. For example, if there is an anticipation of war, citizens will start buying their required stocks and store them for use at the time of war, even if the prices of those goods keep on increasing. Thus, this is the exception of the law of demand as even with the increase in prices of the goods, demand for and for those goods will not decrease in a war situation.There are certain assumptions about the law of demand. If any assumptions do not hold, then the law of demand will not be applicable in those cases.

Important Points

Conclusion

Thus it can be concluded that when the other things are the market are being equal then the per unit quantity demanded of the product will be greater when there is a reduction in the prices of that commodity whereas per unit quantity demanded of the product will be less when there is an increase in the prices of that commodity. There are certain exceptions to the law of demand and there are certain assumptions of the law of demand. In the case of exceptional situations, the law of demand will not work. similarly, if there is any change in the assumption then also the law of demand will not work. However, the limitations or the exceptions of the law of demand do not falsify general law which must operate.

When there is a lot of change in the quantity demanded with the change in the price then it is called the elastic demand whereas when there is no much change in the quantity demanded with the change in the prices then it is called the inelastic demand.
There are certain exceptions of the law of demand which include war, depression, demonstration effect, Giffen paradox, speculation, ignorance effect, and necessities of life.
Along with the exceptions, there are certain assumptions of the law of demand without which the concept of law of demand would not hold true. These assumptions are
No change in consumer’s tastes and preferences.
No change in the prices of the other products.
No change in the size of the population.
No expectation for the change in the prices in the future.
Consumer income remains constant.
No substitute for the product is there.
Consumer habits should remain the same and should not change.
No change in consumer’s tastes and preferences.
No change in the prices of the other products.
No change in the size of the population.
No expectation for the change in the prices in the future.
Consumer income remains constant.
No substitute for the product is there.
Consumer habits should remain the same and should not change.