Definition of the Law of Demand and the Exceptions to the Law of Demand
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Definition of the Law of Demand and the Exceptions to the Law of Demand

Definition of the law of demand and the exceptions to the Law of Demand Generally the demand curve slopes downwards from left to right. Or, in other words, the higher the price of good, other things is remaining the same, the smaller will be the quantity normally bought. Similarly, the lower the price of a good, the greater will be the quantity normally purchased. This is in accordance with the law of diminishing marginal utility.

Definition of the law of demand and the exceptions to the Law of Demand

Generally the demand curve slopes downwards from left to right. Or, in other words, the higher the price of good, other things is remaining the same, the smaller will be the quantity normally bought. Similarly, the lower the price of a good, the greater will be the quantity normally purchased. This is in accordance with the law of diminishing marginal utility. The purchases of most of us are governed by this law. When the price falls, new purchasers enter the market and old purchasers will probably purchase more. Some consumers will buy the particular commodity in preference to other. This happens because the price of the commodity has fallen. The law of diminishing marginal utility essentially states that each additional unit of a good consumed within a given time period yields diminishing utility. This being the case the consumer will not be prepared to pay same price per unit for the additional units of this good. Consequently, it is to be expected that the consumer will buy additional units only at a lower price.

If the law of diminishing marginal utility is true—and it is generally true—the curve must slope downward, for only then the phenomenon of increasing demand with falling prices can be represented.

There are three obvious reasons why people buy more when the price falls:

(i) A unit of money goes farther and one can afford to buy more.

(ii) When a thing becomes cheaper one naturally likes to buy more.

(iii) A commodity tends to be put to more uses when it becomes cheaper Thus, the old buyers buy more and some new buyers enter the market The cumulative effect is an extension of demand when price falls.

But let us go a bit deeper and try to find out why the demand extends when the price falls, other things being equal. Benham has answered this question in this manner: Having a limited amount of money at his disposal, every consumer wants to get the maximum satisfaction there from. Knowing his own scale of preferences he will, according to the law of substitution and equi-marginal returns, so arrange his expenditure that he gets equal marginal utility from the last paisa that he spends in different ways. He will keep to this arrangement if the prices remain the same. But if the price of a certain commodity included in his assortment of goods and services, falls, then he must make a corresponding alteration in his scheme of expenditure. By the fall in price divergence has been created between the marginal utility and price and this must be rectified this can be done by buying more of the commodity, thus bringing its marginal utility to the level of the price. That is why people buy more when the prices fall.

Exceptions to the law of Demand or Exceptional Demand Curves

Sometimes the demand curve, instead of sloping downwards will rise upwards from left to right. In other words, sometimes people will buy more when the price rises. This can be represented only by a rising curve such occasions are very rare, but we can imagine some. These were first investigated by Sir Robert Giffen. The Giffen Paradox holds that the demand is strengthened with a rise and weakened with a fall in price.

Benham has mentioned the following four cases:

(i) In case a serious shortage is feared, people may be in a panic and buy more even though the price is rising. This is expectational rise in prices.

(ii) When the use of a commodity confers distinction, then the wealthy people will buy more when the price rises, to be included among the few distinguished personages. Conversely, people tend to cut their purchases if they believe the commodity to be inferior. -

(iii) Sometimes people buy more at a higher price in sheer ignorance.

(iv) If the price of a necessary of life goes up, the consumer has to readjust his whole expenditure. He may cut down his expenses on other food articles and in order to.make up, more may have to be spent on this particular food, more of which will, therefore, be purchased in spite of its high price.

 

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Comments (1)

interesting reading.thanks

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