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Solution - State and Explain the Law of Demand with Its Assumptions. - Demand Curve and Its Slope


State and explain the law of demand with its assumptions.

Solution 1

Law of Demand:-

Law of demand is one of the important basic laws of consumption. Dr. Alfred Marshall, in his book "Principles of Economics", has explained the law of demand as follows.

"Other things being constant the higher the price of the commodity, smaller is the quantity demanded arid lower the Mice of the commodity larger is the quantity demanded."

The law of demand explains change in the behaviour of consumer demand due to various changes in price. Marshall's Law of demand describes functional relation between demand and price. It can be expressed as D = f (P) that is demand is function of price. The relation between price and demand is inverse, because larger quantity is demanded when price falls and smaller quantity will be demanded when price rises. The law of demand is explained with the help of the following schedule and diagram.

                   Table No. 3.3 = Demand Schedule

Price of Mangoes
Per Kg. (Rs.)
Demand for Mangoes
50 1
40 2
30 3
20 4

As shown in the schedule when price of mangoes is Rs. 5O/- per kg. demand is, 1 kg. When price falls to the level of Rs. 40/- per kg. and demand rises to 2 kg. Similarly, at the price Rs. 10/- per kg. demand of mangoes is 5 kg., whereas 4 kg. of mangoes are demanded at price Rs. 20/- per kg. This shows inverse relation between price and demand.

In this diagram X axis represents demand for mangoes, whereas Y" axis represents price of mangoes. DD is demand! curve which slopes downwards from left to right. In other words, its slope is negative because of inverse relationship between price and demand.

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.


Solution 2

The law of demand focuses on the basic relationship between the price of the good and quantity demanded of the good.

According to this law, other things being constant (ceteris paribus), a consumer’s demand shares an inverse relationship with the price of a good and vice versa. In other words, if the income, price of related goods and taste and preferences of the consumer remain unchanged, then the demand for the good moves in the opposite direction of its price.

The law of demand is based on the following assumptions:

i. Size of the population remains the same.
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.
The law of demand can be explained with the help of the following demand schedule
Price of Commodity (X)
Quantity Demanded of X
5 100
10 75
15 50
20 25

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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2013-2014 (October)
Question 6.1 | 8 marks
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Solution for question: State and Explain the Law of Demand with Its Assumptions. concept: Demand Curve and Its Slope. For the courses HSC Arts, HSC Commerce, HSC Commerce (Marketing and Salesmanship), HSC Science (Computer Science), HSC Science (Electronics), HSC Science (General)