Demand is a vital economic concept that works both at the market level and personal level. It also includes several concepts like law of demand, factors affecting it and eventually the impact of it on the economy at large. Therefore, it is essential for students to get this concept right from the very beginning as it will help to interpret the importance of the law of demand in economics.
However, to make things easier, learners need to delve into the core of this topic to score well.
What is the Law of Demand in Economics?
The law of demand in economics explains that when other factors remain constant, the quantity demand and price of any product or service show an inverse equation. It also means that whenever the value of a specific product increases, demand for the same declines; the exact opposite can also be observed. From this comes a concept of a demanding schedule.
This graphical representation shows that different quantities of product are demanded at varying prices. It thus calls for a law of demand graph to explain elaborately.
Analysis of Law of Demand
In order to run a business in a competitive market, it is essential to understand the law of demand definition economics. This law effectively indicates consumer choice behavior. Moreover, there is a dedicated graph that shows this relationship and helps economists to take economic measures accordingly.
This concept is based on a natural customer choice behavior. As a matter of fact, when the price of any good or service rises, demand for the same tends to fall as the consumers will not spend extra money on something than its standard price and will look for cheaper alternatives.
Moreover, often this question comes up in examinations like “explain law of demand with diagrams”. Therefore, it will be wiser to prepare the question beforehand to answer accurately.
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The above diagram contains a law of demand curve that is always downward sloping. It clearly shows that when the price increases from p2 to p1, the necessitated quantity decreases from Q2 to Q1.
Similarly, the law of demand in economics is an interesting chapter that also includes some related sub-topics like exceptions of this law and so on.
Law of Demand Exceptions
In a few cases, the law of demand in economics does not follow the rule. For instance, often it happens that the demand for a particular product rises along with the price. Therefore, it is vital to know about the exceptions as well to comprehend the law better and understand real-life incidents.
For a good of prestige, the demand almost remains the same even if the price increases.
Similarly, for necessary commodities as well, the demand rises due to its increasing consumption, despite the price rise.
This applies as well in the case of Giffen goods.
These are some of the certain scenarios where the law deviates from its standard rendition.
Thus, to learn more about the law of demand in economics, download the Vedantu App and read vital notes on this topic. Moreover, they also offer various problems on this topic so that you can get a better grip on Economics.
Factors Affecting Demand
Several factors can influence the shape and position of the demand curve. Rising income tends to raise demand for common economic commodities since individuals are more eager to spend. The availability of close alternative items that compete with particular economic goodwill tends to reduce demand for that good since they can satisfy the same types of consumer wants and needs. Availability of closely complementary products, on the other hand, will tend to raise demand for an economic item, because combining two goods might be even more useful to consumers than utilising them individually. Other variables that vary the pattern of customer preferences for how the product may be utilized and how urgently it is needed, such as future expectations, changes in background environmental circumstances, or changes in the actual or perceived quality of a good, might shift the demand curve.
Importance of Law of Demand
Price Determination - The study of law of demand is helpful for a trader to fox up the price of a commodity. He understands how much demand will decline if the price of the commodity rises to a certain level, and how much demand will grow if the price of the commodity falls. The market demand schedule can offer information on overall market demand at various prices. It helps management in determining how much of a price rise or drop in a commodity is beneficial.
Importance to the Farmers - Farmers' economic situation is affected by whether they have a good or bad crop. If a good crop fails to generate demand, the crop's price will drop drastically. The farmer will not benefit from a successful harvest, and vice versa.
Importance to the Government - Governments evaluate the law of demand when deciding whether or not to impose additional taxes or tariffs on products, particularly when the amount demanded is not strongly influenced by price.
Major Facts about Law of Demand
It expresses the inverse relationship between demand and price. It basically states that an increase in price will cause a decrease in the amount requested, whereas a decrease in price would cause a rise in quantity demanded.
It simply makes a qualitative statement, indicating the direction of change in the quantity requested but not the magnitude of change.
It does not demonstrate a proportionate link between price changes and subsequent demand changes. If a price increases by 10%, the quantity demanded may decrease in any proportion.
The law of demand is one-sided since it only explains how price changes affect the amount required. It makes no mention of the impact of changes in demand on the price of the item.
Difference between Demand and Quantity Demanded
It is critical in economic theory to distinguish between the concept of demand and the amount demanded. The term "demand" in the chart refers to the green line that runs through A, B, and C. It expresses the link between the urgency of consumer desires and the quantity of the economic item available. A shift in demand shows that this curve's position or shape has changed; it represents a movement in the underlying pattern of consumer desires and requirements in relation to the resources available to satisfy them.
The term "quantity demanded," on the other hand, refers to a point on the horizontal axis. Variations in the quantity demanded are only due to price changes and do not indicate any shift in customer preferences. Changes in quantity demanded simply refer to movement along the demand curve as a result of a price adjustment. These two concepts are sometimes confused, but this is a common misunderstanding: prices do not reduce or raise demand; rather, they alter the amount required.
Relationship between Supply and Demand
The law of supply and demand asserts that the price of a product or service will vary depending on the amount sold by the supplier and the demand from consumers. Therefore, if a product is costly, the seller will ramp up manufacturing. However, If the price is extremely high, buyers will likely buy less of it, resulting in lower demand.