Law of Demand

The law of demand expresses the functional relationship between the price and quantity of a commodity demanded. The law of demand may be stated as follows: other things being equal, if the price of a commodity falls, the quantity demanded of it will rise and if the price of the commodity rises, its quantity demanded will decline. Thus, according to the law of demand, there is an inverse relationship between price and quantity demanded, other things remaining the same. These other things which are assumed to be constant are a) tastes and preferences of the consumer, b) income of the consumer and c) prices of related goods (substitute and complementary goods). If these other factors, which determine demand, also undergo a change, then the inverse price-demand relationship may not be valid.

FIg 4.1: Demand Curve

The law of demand can be illustrated through a demand curve (Fig. 4.1). Suppose, the consumer purchases OQ0 quantity of rice for OP0. If the price of rice rises from OP0 to OP1 the quantity demanded decreases from OQ0 to OQ1. Similarly, if the price falls from OP0 to OP2, the quantity demanded rises from OQ0 to OQ2. Thus, there is a negative relationship between the price and quantity demanded. In other words, the demand curve slopes downward from left to right. The law of demand can be expressed in the functional form as follows:

Qd = f (P, I, PR/T)

Where,

Qd = quantity demanded of a commodity

P = Price of the commodity

I = Income of the consumer

PR = Prices of the related goods

T = Tastes and preferences of the consumer

Why does the Law of Demand operate?

Now, an important question is: why the demand curve slopes downward, or in other words, how the law of demand describing inverse price-demand relationship is valid? There are three reasons for the operation of the law. Firstly, the law of demand is operated because the law of diminishing marginal utility comes into force when a consumer buys additional quantities of a particular commodity.