Law Of Demand

The law of demand states in microeconomics that "as the price of a good increases, quantity demanded decreases; conversely, as the price of a good decreases, quantity demanded increases."

 

To put it another way, the law of demand describes an inverse relationship between a good's price and the quantity demanded. Alternatively, if all other factors remain constant, the quantity demanded of a commodity is inversely related to its price. A consumer may, for example, demand 2 kilogrammes of apples at Rs. 50 per kilogramme, but only 1 kilogramme if the price rises to Rs. 100 per kilogramme. This has been the general human reaction to the relationship between commodity price and quantity demanded. Other determinants of demand, such as the prices of other goods and the consumer's income, are referred to as the factors held constant. Prices and quantities demanded are related by demand curves if no other factors change. The ceteris paribus assumption is what it's called.

 

An entire demand curve can shift right or left due to changes in factors such as average income and preferences. As a result, at a given price, a higher or lower quantity is demanded.

 

Let's say we have an initial demand curve for a specific type of vehicle. Now imagine that the economy expands in such a way that many people's incomes rise, making automobiles more affordable. The demand curve will shift as a result of this.

 

The demand curve shifts to the right, towards D1, as a result of higher income levels. People with more money are more likely to buy a car at a given price, resulting in an increase in the quantity demanded.

 

Reduced incomes would have the opposite effect, shifting the demand curve to the left, toward D2. People on average have less money, so they are less likely to buy a car at a given price, lowering demand.

 

A shift in demand is caused by a variety of factors other than income. Tastes and preferences, the composition or size of the population, the prices of related goods, and even expectations are all factors that influence demand. A shift in demand is caused by a change in any of the underlying factors that determine how much people are willing to buy at a given price. The new demand curve is either to the right of the original demand curve, indicating an increase, or to the left, indicating a decrease.

 

These shifts are largely due to changes in taste, which alter the quantity of a good demanded at every price point—that is, they shift the demand curve for that good rightward when preferences become positive and leftward when preferences become negative.

 

Nursing homes and hearing aids are in higher demand in a society with a higher proportion of elderly people. Similarly, changes in population size can affect demand for housing and a variety of other goods. Each shift in demand will be represented by a shift in the demand curve.

 

Changes in the prices of related goods, such as substitutes or complements, can also affect demand for a product. A substitute is a product or service that can be used in place of something else. The demand for the other product is reduced when the price of a substitute is reduced. The effect of a higher price for a substitute good is the opposite.

 

Other goods are complementary to one another, which means they are frequently used together because consumption of one good tends to increase consumption of the other. Breakfast cereal and milk are examples, as are notebooks and pens or pencils, cricket balls and bats, and so on. A higher price for skis shifts the demand curve for a complementary good like ski resort trips to the left, whereas a lower price for a complement shifts the demand curve to the right.

 

A normal good is a product whose demand rises as income rises and vice versa. However, there are a few exceptions to this rule. Many people will buy fewer generic-brand groceries and more name-brand groceries as their income rises. They are less likely to purchase used vehicles and are more likely to purchase new vehicles. They will be less likely to rent an apartment and more likely to purchase a home, and so forth. An inferior good is a product whose demand decreases as income rises and vice versa. To put it another way, as income rises, the demand curve shifts to the left.

 

While it is obvious that a good's price influences demand, it is also true that expectations about future prices—as well as expectations about tastes and preferences, income, and so on—can influence demand. People may rush to the store to buy flashlight batteries and bottled water if they hear that a cyclone is approaching. People may rush to the store to stock up on coffee now if they learn that the price of a good like coffee is likely to rise in the future. Shifts in the curve represent these changes in demand. As a result, a shift in demand occurs when an economic factor other than price causes a different quantity to be demanded at all prices.

 

A Giffen good is a substandard good that people consume more of as the price rises and vice versa, defying microeconomics' basic law of demand. The term "Giffen good" was coined in the late 1800s and was named after Sir Robert Giffen, a well-known Scottish economist, statistician, and journalist. Giffen goods are usually subpar products with no readily available substitutes. Although all Giffen products are inferior, not all inferior products are Giffen products.

 

Veblen goods are types of luxury goods for which the quantity demanded rises as the price rises, resulting in an upward-sloping demand curve that appears to defy the law of demand. Because of their high prices, some goods become more desirable. When "fashion" jeans became popular in the 1990s, one retailer was able to sell more after raising the price. In the practises of conspicuous consumption and conspicuous leisure, a higher price may make a product desirable as a status symbol. Veblen goods are named after Thorstein Veblen, an American economist who was the first to identify conspicuous consumption as a form of status seeking. The Veblen effect has the corollary that lowering the price reduces the quantity demanded.