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In: Economics

Law of Demand in Economics.

 What is meant by Law of Demand in Economics. And what are the factors that affecting Quantity of Demand in Economics. Expain it.

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Expert Solution

Law of Demand -

The law of demand states that, other things remaining the same, there is inverse relationship between price and quantity demanded of a product, i.e. increase in price reduces the quantity demanded and decrease in price increases the quantity.

 

Factors Affecting Quantity Demanded -

Demand is not dependent on price alone. there are many other factors which affect the quantity demanded of a product.

These factors are as follows:

1. Price of the Product

2. Income of the Consumer

3. Prices of Related Goods

           (a) Complementary Goods 

           (b) Substitute Goods

4. Consumer's Tastes and Fashions 

5. Expectations of Future Prices

        The relationship of quantity demanded with the above factors can be explained as follows:

 

1. Price of the Product -

Price and quantity are inversely related i.e. increase of price reduces the quantity and vice-versa. Only in those goods which are taken for prestige or the giffen goods we may get direct relationship. The goods of prestige are those goods which are important only for their high price. If their price falls, they lose their importance and then nobody would like to purchase it. These goods are diamond and other precious stones, antique goods etc.

 

2. Income of the Consumer -

Consumer's income and quantity demanded are generally positively related. It means that when income of the consumer rises he wants to have more units of that commodity and when his income falls he reduces the demand. In inferior goods, however, the relationship is opposite i.e. increase in income reduces the demand because he shifts his consumption to superior goods and foregoes his existing product, thus reducing its demand.

 

3. Prices of Related Goods -

The two products may be related in two ways -

Firstly, as Complementary Goods 

secondly, as Substitute Goods.

  • Complementary goods are those goods which are used jointly like, a tennis ball and a racket, petrol and car or tea and sugar. Substitute Goods, on the other hand, are goods, which can be used in place of another, like tea and coffee; a scooter and a motor cycle etc.
  • In case of Complementary Goods, the relationship between the price of a product and the quantity demanded of another is inverse. If the price of petrol increases the demand for car would go down. In case of Substitute Goods we have a direct relationship.
  • For example, if the price of tea increases the demand for coffee would also increase and vice versa. This would happen because the increase in price of tea would decrease its quantity demanded and people would switch over to its substitute commodity i.e. coffee.

 

4. Consumer's Tastes and Fashions -

Consumer's tastes, preferences and current fashions also determine the demand of a product. If a consumer has high taste for a product he would take more quantity of that product even if its price is high and would take very little of the product which he does not like. Similarly, if a product is in current fashion the consumers develop high demand for that product and when it is out of fashion no consumer shows interest in purchasing it even though its price is low.

 

5. Expectations of Future Prices -

The current demand of a product also depends on its expected price in future. If future price is expected to rise, its present demand immediately increases because the consumer has a tendency to store it at low prices for his future consumption. If, however, the price of a product is expected to fall then he has a tendency to postpone its consumption and as a result the present demand would also fall. For example, in a stock market, if the price of a share is expected to rise its demand increases immediately and if future price is expected to fall its demand immediately falls. This fact is true for other products also.

 

 


The law of demand states that, other things remaining the same, there is inverse relationship between price and quantity demanded of a product, i.e. increase in price reduces the quantity demanded and decrease in price increases the quantity.

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