Law of demand in economics

“The demand for a commodity increases with a fall in its price and decreases with a rise in its price, other things remaining the same”. The law of demand thus merely states that the price and demand of a commodity are inversely related, provided all other things remain unchanged or as economists put it ceteris paribus.

The above statement of the law of demand, demonstrates that that this law operates only when all other things remain constant. These are then the assumptions of the law of demand. We can state the assumptions of the law of demand as follows:

INCOME LEVEL SHOULD REMAIN CONSTANT: The law of demand operates only when the income level of the buyer remains constant. If the income rises while the price of the commodity does not fall, it is quite likely that the demand may increase. Therefore, stability in income is an essential condition for the operation of the law of demand.

TASTES OF THE BUYER SHOULD NOT ALTER: Any alteration that takes place in the taste of the consumers will in all probability thwart the working of the law of demand. It often happens that when tastes or fashions change people revise their preferences. As a consequence, the demand for the commodity which goes down the preference scale of the consumers declines even though its price does not change.

PRICES OF OTHER GOODS SHOULD REMAIN CONSTANT: Changes in the prices of other goods often impinge on the demand for a particular commodity. If prices of commodities for which demand is inelastic rise, the demand for a commodity other than these in all probability will decline even though there may not be any change in its price. Therefore, for the law of demand to operate it is imperative that prices of other goods do not change.

NO NEW SUBSTITUTES FOR THE COMMODITY: If some new substitutes for a commodity appear in the market, its demand generally declines. This is quite natural, because with the availability of new substitutes some buyers will be attracted towards new products and the demand for the older product will fall even though price remains unchanged. Hence, the law of demand operates only when the market for a commodity is not threatened by new substitutes.

PRICE RISE IN FUTURE SHOULD NOT BE EXPECTED: If the buyers of a commodity expect that its price will rise in future they raise its demand in response to an initial price rise. This behaviour of buyers violates the law of demand. Therefore, for the operation of the law of demand it is necessary that there must not be any expectations of price rise in the future.

ADVERTISING EXPENDITURE SHOULD REMAIN THE SAME: The advertising expenditure on the good under consideration is taken to be constant.

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