Law of Demand and Limitations of Demand in Micro Economics
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Law of Demand
The law of demand is one of the most important laws in economics.
It was propounded by Professor Alfred Marshall in 1890 A.D. in his famous book “Principle of Economics.”
This law states that the quantity demand is inversely related to price of goods, other things remaining same (ceteris paribus).
It means higher the price lowers the demand and lower the price higher will be the quantity demand remaining other thing same.
Here, other thing means income of the consumer, taste and preferences, number of population etc.
The law of demand operates only if factors determining to the demand other than prices are constant.
According to Marshall, ”Other things remaining the same, the amount demanded increases with a fall in price and diminishes with a rise in price.”
Assumptions:
The law of demand is based on various assumptions given as below:
· No change in price of related goods
· No change in Income level and taste of consumers
· No change in Size of population
· No change in taxes and advertisement
Law of demand can be explained with the help of demand schedule as follows:
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Currency of your country
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Price (in Rs) |
Demand (per day) |
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|
5 |
40 |
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|
10 |
30 |
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|
15 |
20 |
|
In the above table, the initial price of x-good is supposed to be Rs 5 per kg and demand is 40 kg per day.
If the prices raise to Rs 10 the consumer reduce their demand to 30 per kg.
Again, if the price further increases to Rs 15 then demand further decreases to 20 kg per day.
It shows that quantity demand changes inversely with change in price, other things remaining same.
In the figure, demand in kg per day is placed on X-axis and price in Rs per kg is presented in Y-axis.
DD denoted the demand curve. It is downward sloping from left to right.
It shows the inverse relationship between quantity demand and the price.
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Accounting Equation |
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Basic Journal Entries in Nepali |
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Basic Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cash Book |
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Trial Balance & Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Final Account: Class 11 |
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Adjustment In Final Account |
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Capital and Revenue |
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Single Entry System |
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Non-Profit Organization |
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Government Accounting |
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Goswara Voucher (Journal Voucher) |
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Limitations of Demand (Exceptions of Law of Demand)
Prestigious goods
Demand for goods of prestige like gold, demand may not decrease even there is rise in price.
They are purchased and consumed because of their high prices.
Hobbies
The law of demand is not applicable in case of goods of hobbies like ticket collection, and collection of historical and archaeological materials and so on.
The things are collected even by paying more and more price.
Addiction
In case of goods and addiction like alcohol, tobacco, drugs etc the demand does not decrease even there is increase in price.
Instead of operation of law of demand consumers purchase more units even if there is rise in price.
Giffen goods
Demand for Giffen goods increase even there is rise in price and vice versa.
The law of demand isn’t applicable to them.
The goods whose demand is inversely related with income of the consumer are called inferior and Giffen goods.
Tradition and culture
The goods consumed according to tradition, culture and religion have demand usually not inversely related to price.
For example, during Dashain the Nepalese people purchase more goods to celebrate the festival even if prices are increased.
Future expected price
When the consumer expects low price in the near future, the demand of the goods is lower even at low price at present and vice versa.
Change in taste and preference
If the consumers have the fear of the goods out of fashion in near future, they demand less even if prices are decreased.
Irrationality
Law of demand is not applicable in case of irrational consumers.
The irrational consumers purchase those goods which are expensive.
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Share (Accounting for Share) |
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Share in Nepali |
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Debentures |
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Final Account: Class 12 |
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Final Account in Nepali |
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Work Sheet |
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Ratio Analysis (Accounting Ratio) |
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Fund Flow Statement |
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Cash Flow Statement |
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Theory Accounting Xii |
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Theory: Cost Accounting |
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Cost Accounting |
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LIFO−FIFO |
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Cost Sheet, Unit Costing |
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Cost Reconciliation Statement |
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