Question

Question No 4:

a) The law of demand is the first and primary law of economics. Do you agree? Explain the law of demand with the help of a clearly labelled diagram. [Answer in 150 – 200 words]

[Draw in paper; take photo and paste/Use MS Word/add screenshot]

b) Though, the law of demand is the primary law of economics, it is subject to certain limitations in the form of exceptions. Discuss any five such exceptions to law of demand with valid examples.

[Answer in 150 – 200 words] (5 Marks

Answer 1

a ) The law of demand expresses a relationship between the quantity demanded and its price. It may be defined in words as “the amount demanded increases with a fall in price, and diminishes with a rise in price”. Thus it expresses an inverse relation between price and demand. The law refers to the direction in which quantity demanded changes with a change in price.

On the figure, it is represented by the slope of the demand curve which is normally negative throughout its length. The inverse price- demand relationship is based on other things remaining equal.

Assumptions

Every law will have limitation or exceptions.This law operates when the commodity’s price changes and all other prices and conditions do not change. The main assumptions are

• Habits, tastes and fashions remain constant
• Money, income of the consumer does not change.

b) Exceptions to Law of demand are -

1. Giffen goods: these are those inferior goods on which the consumer spends a large part of his income and the demand for which falls with a fall in their price. The demand curve for these has a positive slope. The consumers of such goods are mostly the poor. a rise in their price drains their resources and the poor have to shift their consumption from the more expensive goods to the giffen goods, while a fall in the price would spare the household some money for more expensive goods. which still remain cheaper. These goods have no closely related substitutes; hence income effect is higher than substitution effect.

2. Commodities which are used as status symbols: Some expensive commodities like diamonds, air conditioned cars, etc., are used as status symbols to display one’s wealth. The more expensive these commodities become, the higher their value as a status symbol and hence, the greater the demand for them. The amount demanded of these commodities increase with an increase in their price and decrease with a decrease in their price

3. Expectations regarding future prices: If the price of a commodity is rising and is expected to rise in future the demand for the commodity will increase.

4. Emergency: At times of war, famine etc. consumers have an abnormal behaviour. If they expect shortage in goods they would buy and hoard goods even at higher prices. In depression they will buy less at even low prices.

5. Quality-price relationship: some people assume that expensive goods are of a higher quality then the low priced goods. In this case more goods are demanded at higher prices.

• Prices of other goods remain constant
• The commodity in question has no substitute
• The commodity is a normal good and has no prestige or status value.
• People do not expect changes in the prices.