Law of Demand: Definition, Exceptions, and Graph for UGC NET

In simple terms, the law of demand is phrased as: In general, an increase in the price of a commodity reduces the quantity of that commodity demanded, and a decrease in its price increases the quantity demanded, leaving all other factors unchanged. In other words, price and quantity demanded have an inverse relationship between them. The Law of Demand is an economic concept explaining how the price offered for something will affect how much people want to buy it. It states that when the price of a given commodity increases, generally, fewer units are demanded; conversely, when the price of a commodity falls, it tends to increase demand. For instance, if the price of ice cream increases, fewer people will want to buy it. However, if the price of ice cream decreases, more people will want to buy it because it becomes cheaper. The Law of Demand shows how people make choices based on price, and it helps businesses decide how much to charge for their products. Understanding this law is important to both buyers and sellers. It helps explain why prices can change over time and how it affects what we buy. In short, the Law of Demand shows how price changes can change the number of products people want to purchase. Understanding the Law of Demand for UGC NET helps aspirants tackle key microeconomics questions effectively and prepare for exam-specific case-based applications.

Hazards and disasters is a very vital topic to be studied for the competitive exams such as the UGC NET Exams and is likely to be asked in the paper 1.

In this article, the readers will be able to know about the following: 

• What is the Law of Demand?
• Assumptions of Law of Demand
• Exceptions to the Law of Demand
• Law of Demand Diagram
• Law of Demand Example
• Demand Schedule and Interpretation
• Law of Demand Curve
• Relationship Between the Law of Demand and Price Elasticity
• Law of Demand Formula

Click Here to Download UGC NET Paper 1 Important Questions PDF

What is the Law of Demand?

The Law of Demand is a simple concept in economics that describes how the price of something can change the amount of it people want to buy. It says that when the price of a product goes up, people tend to buy less of it, and when the price goes down, people usually want to buy more. For instance, if the price of a toy is increased, fewer people may buy it because it is too expensive. However, if the price of the toy is decreased, more people may buy it because it is less expensive and within their budget. This is so because people have limited money to spend, hence they are very cautious about what they purchase when prices are high. It aids businesses in finding the price they should put on their products in order to be able to sell more, thus helping people choose how to use their money appropriately. The bottom line is, the Law of Demand illustrates the effect of the price of things on the choice we make concerning buying.

The Law of Demand is based on certain assumptions that help explain how people make decisions about what to buy. These assumptions are important because they help us understand why people buy more or less of something depending on its price. Let's look at some of the key assumptions that make the Law of Demand work.

Ceteris Paribus (All Other Things Being Equal)

The assumption of Ceteris Paribus means "all other things being equal." It allows economists to focus solely on how price affects demand while ignoring other factors like income or preferences. This helps simplify demand analysis and makes it easier to study the effect of just one variable-price.

Consumers Have Limited Income

Consumers are not ever going to have limitless money to get everything they want. As prices rise, people buy less because they must prioritize and allocate their limited income among the various goods. This is an explanation of why demand shrinks with prices.

The Product is a Normal Good

A normal good is something people buy more of when their income rises. If prices increase, even the wealthy consumers might buy less of it. The Law of Demand applies from the assumption of being a normal product so as to understand how both price and income coerce demand.

Substitutes are Available

It is assumed in this case that there are alternative products for the subject product. When the price of a product goes up, the consumers will shift to cheaper alternatives. This explains demand fall with price rise.

No Change in Consumer Preferences

It is supposed that the tastes of consumers are the same while observing how price affects demand; if tastes are changed, people may buy more even if the price goes up. Keeping preferences between alternatives constant isolates the impact of price on demand.

No Time for Future Expectations

The Law of Demand assumes that consumers consider the present price only and not what may happen to prices in the future, for if people expect that future prices will go up or come down, they would change their present consumption decision. This acceptance makes the analysis easy on current prices.

Homogeneous Goods 

This assumption states that all units of a product are identical. If products are the same, price becomes the main factor influencing buying decisions. By doing so, it explains why consumers choose cheaper options when quality is equal.

Exceptions to the Law of Demand

Though the Law of Demand holds true most of the time, there are situations where it is not applicable. In such situations, people buy more of a product when its price increases and less when its price decreases. Let's take a look at a few examples where the Law of Demand does not work.

Giffen Good 

These are the commodities whose demand increases as the price rises. These commodities are mostly necessities; it is rice or bread, mostly preferred by lower-income consumers. The price is high, but they buy more because they cannot afford the costlier substitute.

Veblen Goods

Veblen goods are luxury items that become more coveted when their prices become higher. These include items such as designer clothes or luxury cars all deemed to be status symbols. People buy them not for their utility but rather as forms of wealth display and prestige.

Speculative Bubbles

Speculative bubble is where people keep making purchases of goods like real estate or stock in the hope that prices continue to rise. Even though they offer high prices, buyers flock together thinking they can sell later on at a profit. This is one of those particular cases that go against the Law of Demand because it does not consider current value but future expectation.

Necessities 

These are the items which an individual must buy irrespective of cost. As for example, medicines, water, or staple foods still bought with rising prices. Such necessities incur less sensitivity regarding demand against price changes.

Brand Loyalty 

Brand loyalty is when consumers continue to purchase a product from a favored brand even though there is an increase in cost. The extra cost is justified with a feeling of quality or experience. In such cases, demand is retained, despite the increasing price of the commodity.

Price Cuts Cause More Demand 

Sales have really strong price reductions, and consumers often purchase more than they need. It's not just about lower prices; even excitement about getting a deal causes overbuying. This behavior can go beyond what the Law of Demand would normally predict.

Time Sensitivity and Emergency Purchases 

During emergencies, need takes precedence over cost. Bottled water or fuel sells even when prices are hiked. Such needs by nature outweigh price sensitivity at normal times.

Law of Demand Diagram

The Law of Demand diagram will enable us to see graphically how the price of a commodity impacts the quantity of people who are willing to buy. The curve is downward sloping, indicating that if the price rises, the demand tends to decrease. This diagram represents a simple way of viewing the relationship between price and demand for a commodity.The Law of Demand curve graph shows a downward slope, reflecting the fundamental inverse relationship between price and quantity demanded.

Fig: law of demand

Law of Demand Example

The Law of Demand is represented through the price of movie tickets. There has been a rise in the price of a movie ticket from $10 to $15. As the price goes up, fewer people might want to buy tickets and the number of the movie's demand may decrease. However, if the price of the ticket falls, say from $10 to $5, more people might be willing to buy tickets because it's cheaper. This shows how, generally, when the price of something rises, people buy less of it, and when the price falls, people buy more, just as the Law of Demand suggests. Among the best examples of the Law of Demand is the movie ticket case, which clearly shows how people adjust their consumption based on price changes

Demand Schedule and Interpretation 

A demand schedule is a tabulated display of how much of a product consumers are willing to buy at different prices over time, while all else remains constant. It is the numerical basis for plotting the demand curve and comprehends the Law of Demand visually. A demand schedule table illustrates how quantity demanded changes with price, serving as a numerical base for drawing the demand curve. Here's a simple demand schedule example:

Therefore, in this schedule of demand, we can see the classic inverse relationship between price and quantity demanded: from ₹10 to ₹20, the demand falls by 100-60 units. It states that price change increases or decreases demand or so says the Law of Demand.

• At ₹10, the product is cheap, so it's in a high demand (100 units).
• 80 units at ₹15 = price becomes unattractive, demand drops further.
• 60 units in demand as fewer people were willing or able to buy it at ₹20.

Such a demand schedule with respect to UGC NET aspirants becomes very important in constructing a demand curve. Under it appears the graph:

• The price is plotted on the vertical (Y) axis.
• The quantity demanded is plotted on the horizontal (X) axis.
• Thus, plotting these points and joining them gives us the pictorial downward demand curve, reinforcing the Law of Demand.

Law of Demand Curve

The Law of Demand curve shows how demand for a commodity changes with respect to its price. It is graphically drawn as a negatively sloped curve that helps explain the relationship between price and quantity demanded. Now, let's explore some very important parts of the Law of Demand curve.

Downward-Sloping Curve 

The downward sloping of the demand curve shows that with the rise in prices, people tend to buy lesser of the product. Thus, price and demand move in opposite directions.

Price on the Vertical Axis

On a demand graph, the price is treated on the vertical or up-and-down axis with respect to the higher price being located at a higher point on this axis. Thus, this illustration gives us a clear-cut view of how consumers' willing to buy is affected by price changes.

Quantity on the Horizontal Axis

The quantity is printed on the horizontal or left-to-right axis of the demand graph. It shows how many units of a product consumers are willing to buy at different price levels. As prices drop, quantity demanded usually rises.

Shifts in the Demand Curve

The demand curve can shift to the left or right for reasons other than price; a rightward shift means an increase in demand at all price levels, while a leftward shift means a decrease in demand. These shifts usually occur due to changes in income, preferences, or other market conditions.

Law of Demand Formula

The Law of Demand formula explains how the price of a product influences the quantity people are willing to buy. Although we commonly use graphs to illustrate this relationship, the formula can also state the same principle in numerical form. Let's see how the formula works and what it tells us about price and demand.

The Basic Formula

The basic formula for the Law of Demand is: “Demand = f(Price)”. This means that demand depends on price. The higher the price, the lesser the demand and vice versa, when the price is low, the demand becomes high. "f" represents "function" meaning that the quantity demanded depends on the price of the commodity.

Price and Demand Relationship

In the Law of Demand formula, as price increases, the demand decreases. For instance, if the price of a toy increases, then fewer people may want to buy it. This shows that price and demand are inversely related, meaning they move in opposite directions. The formula helps us understand this relationship in a simple way.

Factors Affecting Demand

Although the formula centered on the importance of price, other determinants can also influence the demand, such as income or product popularity. For instance, even if the price is increased, the demand for the product will rise if a greater number of people have more money to spend. Essentially, the formula has centered on price but changes in those factors will shift demand. This helps in looking at the effect of change in price on demand and the impact of other variables.

Applying the Formula for Prediction

The Law of Demand formula allows a business to determine how a change in price will affect sales. If they need to sell more, they might lower the price. If it is too low, they raise it to gain more profits. The formula explains to both the businesses and buyers how the price affects the decision-making process in buying the product.

Conclusion

Conclusion The Law of Demand is the one that helps in the understanding of how price influences the number of products people purchase. It is understood that the higher the price, the more the people usually buy less. On the other hand, if prices are lower, people buy more. It is an important law because it impacts businesses, shoppers, and the economy. If businesses want to sell more products, they may lower the price to attract more buyers. Conversely, if the price is too high, fewer people may be interested in buying. From this understanding of the Law of Demand, we can make smarter choices about how we spend our money. This also assists businesses in knowing how to set prices so they can sell as much as possible. In summary, the Law of Demand is an essential aspect of how the economy works.

Law of Demand are available in Testbook, so download theTestbook App now.