Question

1. 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]

2. 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]

microeconomics

Answer 1

A. Yes it is the one of fundamental and basic law in economics. It is based on the rational behaviour of individual based on utility maximization and subjected to budget constraint. Optimising agent based on the demand in a supply principle determine the price which results in efficient allocation of resources. It helps in achieving the various other economic goal. It state the inverse relationship between price and quantity demanded. There are two variants law of demand. First based on the marshallian principle of diminishing marginal utility where consumers utility decrease as consumption of one good increases. Consumer substitute other goods to maximize its utility. When there is increase in price so quantity demand of that good will decrease. While there is hicksian demand curve which minimises consumer expenditure with given level of utility. Basically there is two effect work substitution and income effect. In a normal good when price increases substitution effect dominates the income effect. Why in case of inferior good income effect dominate the substitution effect. Demand is backed by the purchasing power of the individual otherwise it called need.

There are certain other factor other than price that shift the demand curve like test reference income and price of other substitute goods. It is generally accepted that when price increases demand of the good decreases which is shown by the moment along the demand curve. Therefore it is called the relationship of price and quantity demanded. there is a difference between demand and quantity demanded. A change in demand reflect the shift in in the demand curve due to factor other than price.

Where the slope of the demand curve sows the elasticity of demand. It can help in categorised the type of goods like necessity luxury and symbolic goods. Law of demand can be aggregated from individual to to market lavel. It server is one of the important tool for fixing the price level.

B. There are some exception to the law of demand in such extreme cases it is not hold. In such cases there are certain other thing beyond the rational assumption of consumer behaviour. There are other social factor which dominate the law of demand.

1. Giffen goods. the quantity demanded of such good increases with the increase in the price. It is observed by Robert Griffin that when price of bread increases, British workers purchase more bread. Why did the law of demand fails the reason behind is that there compel to purchase a fixed amount of bread to maintain their food intake energy. So increase in price does not decrease the consumption. It is very inferior kind of Goods

2. Veblen goods. It is more found in the society when the price increases people demand more of that good due to prestige and status effect. As in case of diamond higher the price, more the desire to hold. This is based on the conspicuous consumption where price does not matter.

3. Banddwagon effect. this is one of common type of exception where law of demand does not work as the demand is based on the relative neighbourhood and friends demand of that good. People purchase due to peer effect irrespective of price. Simple example is the smartphone, if my friend have buy it then I will also purchase although price is high.

3. Expectation and speculation of future price. When price increases people expect price more to increase. Then consumer purchase the product before price increase to get at lower cost. When price decline and price expected to drop in future consumable wait for that decline therefore current decline does not increase the demand.

Suppose the price of gold increases and expected to increase further consumer can buy more before getting it at higher price.

4. Emergency situation. In every extreme situation people does not care about the price because it become very necessity of purchasing that good. For example in medical emergency life saving drug cost higher but i will buy the goods with no purchasing power even buy from taking loan.

5. Ignorance. people often ill conceived about the the low price commodities while tends to buy high priced commodity. Hence they buy the high price commodity with the availability of low price substitute. For example in case of cloth people often value more high price product.