Explain the law of demand with its assumptions.
Assumptions of The Law of Demand:-
The Law of Demand is based on following assumption.
1. Size and composition of population remains constant:-
There should not be any change in the size and composition of population. Because a change in population will bring about a change in demand even if price remains the same.
2. Income of the consumer remains constant:-
Income of consumer should remain constant. If there is any change in income, demand tends to change even though price is constant. For example, if income increases people will demand more quantity of a commodity even at a higher price.
3. Tastes and habits remain constant:-
Taste, habit, custom, tradition and fashion etc. should remain unchanged. Due to changes in taste and preference, people's demand for goods undergoes a change.
4. No change in expectations about future price changes:-
There should not be any change in the expectations about the prices of, goods in future. If consumers expect that price will rise or fall in future, they will change their present demand though price is.constant.
5. Prices of substitutes and, complementary goods remain constant:-
The prices of substitute and complementary goods should remain constant. For instance, if price of tea rises, its demand will fall but demand for coffee will increase.
6. Government Policy remains constan:-
Taxation and fiscal policy of government should not change. A change in income tax, for instance, may cause changes in consumer's disposable income and hence demand.
The law of demand is based on the following assumptions:
ii. Income of the consumer remains unchanged.
iii. Prices of related goods remain unchanged.
iv. Consumer’s tastes and preferences remain unchanged.
v. Government’s policies remain unchanged.
vi. There is no change in the expectations about the future.
|Price of Commodity (X)
|Quantity Demanded of X
The schedule shows that as the price of commodity X increases from Rs 10 to Rs 15, the quantity demanded X falls from 75 units to 50 units. Thus, there is a negative relationship between demand and price.
Let us plot the above schedule on a graph. On the x-axis, we represent the quantity demanded; and on the y-axis, we represent the price of the good. Joining the different combinations of price and quantity demanded, we get a curve DD. This curve is the demand curve showing the inverse relationship between the price and the quantity demanded.
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