Law of demand In economics, the law of demand is an economic law that states that consumers buy more of a good

when its price decreases and less when its price increases (ceteris paribus). The greater the amount to be sold, the smaller the price at which it is offered must be, in order for it to find purchasers. Law of demand states that the amount demanded of a commodity and its price are inversely related, other things remaining constant. That is, if the income of the consumer, prices of the related goods, and tastes and preferences of the consumer remain unchanged, the consumers demand for the good will move opposite to the movement in the price of the good. Exceptions to the law of demand Generally, the amount demanded of good increases with a decrease in price of the good and vice versa. In some cases, however, this may not be true. Such situations are explained below. Giffen goods As noted earlier, if there is an inferior good of which the positive income effect is greater than the negative substitution effect, the law of demand would not hold. For example, when the price of potatoes (which is the staple food of some poor families) decreases significantly, then a particular household may like to buy superior goods out of the savings which they can have now due to superior goods like cereals, fruits etc., not only from these savings but also by reducing the consumption of potatoes. Thus, a decrease in price of potatoes results in decrease in consumption of potatoes. Such basic good items (like bajra, barley, grain etc.) consumed in bulk by the poor families, generally fall in the category of Giffen goods. It should be noted that not all inferior goods are giffen goods, but all giffen goods are inferior goods. This is similar to how all men are humans but not all humans are men. A walkman is considered an inferior good but would not be a Giffen good. Commodities which are used as status symbols Some expensive commodities like diamonds, air conditioned cars, etc., are used as status symbols to display ones 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. Also known as a Veblen good. Expectation of change in the price of commodity If a household expects the price of a commodity to increase, it may start purchasing greater amount of the commodity even at the presently increased price. Similarly, if the household expects the price of the commodity to decrease, it may postpone its purchases. Thus, law of demand is violated in such cases. In the above circumstances, the demand curve does not slope down from left to right instead it presents a backward sloping from top right to down left as shown in diagram. This curve is known as exceptional demand curve.

Assumptions of Law of Demand: The assumptions refer to the conditions under which the law will hold goods. These assumptions are contained in the phrase "other things remain equal". They are explained in detail as follows:

Income: It is assumed that there is no change in the size and distribution of individual income. If there is a change, the law will not operate. If income increases, consumer's purchasing power increases and so demand may increase even if there is a rise in price. Tastes and Preferences: It is assumed that taste and preferences for a commodity remains unchanged and do not move in favor of new products. Population: The size and composition of the total population in the country is assumed to be constant. If population increases, demand for commodities would increase even when prices are rising. Price of substitutes and complementary: The price of substitutes and complimentary are assumed to be constant. If they fall in greater proportion consumer's demand for the substitute will increase and that of the commodity will decrease. Speculation or Expectation regarding future prices: If consumers expect a further fall in the price of the commodity the demand for it would be low in the present even though its price falls. Hence, it is assumed that there should be no change in the expectations regarding future changes in prices. Government policy: The level of taxation and fiscal policy of the government remains the same throughout the operation of the law, otherwise changes in income tax for example may cause changes in consumer's income and as a result demand will change. Range of goods available to the Consumers: The innovation or arrival of new variety of a product in the market may change consumer's preference, so it is assumed to be a constant one. Weather conditions: In case of seasonal goods, a study of demand and price is made during a particular season only, for example: demand for sugarcane juice, and ice creams are made during summer season only. Advertisements: Advertisement and publicity attracts the attention of the consumers. Due to this, there are might be changes in the consumption pattern/ So it is assumed that there is no new product introduced in the market or any new advertisement for the existing product.

Determinants of demand After having understood the nature of demand and law of demand, it is easy to ascertain the determinants of demand. We have mentioned above that an individual demand for a commodity depends on desire for the commodity and the capability to purchase it. The desire to purchase is revealed by tastes and preferences of the individuals. The capability to purchase depends upon his purchasing power, which in turn depends upon his income and price of the commodity. Since an individual purchases a number of commodities, the quantity of a particular commodity he chooses to purchase depends on the price of that particular commodity and prices of the other commodities, as well as the relative amount of his income, or purchasing power. So, the amount demanded (per unit of time) of a commodity depends upon Prices of related commodities When a change in price of the other commodity leaves the amount demanded of the commodity under consideration unchanged, we say that the two commodities are unrelated, otherwise these are related. The related commodities are of two types substitutes and complements. When the price of one commodity and the quantity demanded of the other commodity move in the same direction (i.e., both increase together and decrease together). Income of the individual The amount demanded of a commodity also depends upon the income of an individual. With an increase in income, increased amount of most of the commodities in his consumption bundle, though the extent of the increase may differ between commodities. Tastes and preferences It is quite well that the change in tastes and preferences of consumers in favor of a commodity results in smaller demand for the commodity. Modern business firms, which sell product with different brand names, rely a great deal on influencing tastes and preferences of households in favor of their products (with the help of advertisements, etc.) in order to bring about increase in demand of their products. Tastes of the consumers The amount demanded also depends on consumers taste. Tastes include fashion, habit, customs, etc. A consumers taste is also affected by advertisement. If the taste for a commodity goes up, its amount demanded is more even at the same price and vice-versa. Wealth The amount demanded of a commodity is also affected by the amount of wealth as well as its distribution. The wealthier are the people, higher is the demand for normal commodities. If wealth is more equally distributed, the demand for necessaries and comforts is more. On the other hand, if some people are rich, while the majority is poor, the demand for luxuries is generally less.

Expectations regarding the future If consumers expect changes in price of a commodity in future, they will change the demand at present even when the present price remains the same. Similarly, if consumers expect their incomes to rise in the near future, they may increase the demand for a commodity just now. Climate and weather The climate of an area and the weather prevailing there has a decisive effect on consumers demand. In cold areas, woolen cloth is demanded. During hot summer days, ice is very much in demand. On a rainy day, ice-cream is not so much demanded. State of business The level of demand for different commodities also depends upon the business conditions in the country. If the country is passing through boom conditions, there will be a marked increase in demand. On the other hand, the level of demand goes down during depression.