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Demand Curve and The Law of Demand
A demand curve shows hope that many products will be bought for a given price in a market. It is a representation of the price and quantity relationship that is based on the demand schedule. The demand schedule is a table that shows how many units of a good will be sold at various prices.
The price of the products is put on the vertical or Y-axis, while the quantity is placed on the horizontal or X-axis. The graph shows the relationship between price and quantity at various points. As it can be seen, the lower the price, the more the quantity required. As the price goes down from p0 to p1, the quantity increases from q0 to q1.
The Law of Demand
The price and quantity relationship shown above follows the law of demand which states that the quantity demanded goes down with increasing prices when all other determinants are kept constant. The relationship between price and demand will not change until the four determinants are kept the same.
These four determinants are −
- Price of associated goods or services
- Income of the consumer
- Tastes or preferences of the buyer
- The expectation of the buyer (about future prices)
It must be noted that due to changes in any of these determinants, the demand curve shifts. This is due to the fact that a new demand schedule must be created to show the changes in price and quantity due to the change in the determinants.
Types of Elasticity in Demand
There are different types of relationships between price and quantity demanded. This creates different types of demand elasticity for different products.
In the case of elastic demand, even a little decrease in price levels causes a significant increment in the quantity bought. This means that elastic demand refers to the phenomenon where quantities of items are bought in bulk when the product price decreases.
A good example of elastic demand is ground beef. If the price of beef goes down 25 percent, one might consider buying it three times more than usual because they know it would be consumed and can be stored in a freezer. In the case of perfectly elastic demand, the demand curve becomes a horizontal straight line.
Inelastic demand is the opposite of elastic one. In the case of inelastic demand, there is no change in demand even when the prices go down. In this case, the consumer decides not to buy the products in bulk even when there is a considerable decrease in the price of the products.
A good example of inelastic demand is found in the case of bananas. The buyer in this case won't buy more bananas even if the prices go down enough. This is so because bananas will only get spoiled if they are bought in bulk. In the case of perfectly inelastic demand, the demand curve is a vertical straight line.
Marginal Utility and Demand
In the examples of ground beef and bananas discussed above, the ground beef is bought in bulk because it has marginal utility. As it can be stored in the freezer, the fourth packet of beef is as useful as that of the first.
However, in the case of bananas, there is no marginal utility because they cannot be stored in the freezer for a long time. Therefore, the elasticity of demand depends on marginal utility too. If there is a more marginal utility of a product, it will have the chance to have more elastic demand. If there is no marginal utility, the demand will be inelastic.
Shifts in Demand Curve
- The demand curve shifts right when the demand for the product increases. This means that more quantities would be required at every price.
- When the demand curve shifts left, it shows that there is a decrease in demand for all price levels. In other words, total demand goes down for every price point in the curve. For example, if someone gets a salary hike, he would prefer to buy more ground beef because they have more disposable income. However, if they lose their job, they will probably buy one pack and be happy for getting it at a 25 percent discount.
Law of Demand Exceptions
In a few cases, the law of demand cannot be applied.
For example, often it has been observed that the demand for a particular product goes up along with the price. Therefore, there are some exceptions to the law of demand in some cases.
For a good of prestige, the demand does not change even if the price increases.
Similarly, for the goods that are highly necessary for life, the demand may increase due to their increasing consumption, even if the price rises.
In the case of Giffen goods, the law of demand may not be applicable.
These are some scenarios where the law of demand deviates from the normal.
Importance of Law of Demand
- Price Determination − The study of the law of demand helps in deciding the price of a commodity. Understanding the level of decrease in demand due to a given price rise lets the markets fix the market price of the products. The market demand schedule lets one understand the overall market demand at various prices. It helps the management of firms in determining the level of price rise or drop in a commodity.
- Importance to the Farmers − Farmers' economic conditions are affected by the quality of crops. If a good crop does not generate enough demand, the crop's price will drop drastically. The farmer in such a situation will not benefit from a successful harvest, and vice versa.
- Importance to the Government − Governments use the law of demand when they decide to impose additional taxes or tariffs on products, especially when the amount demanded is mildly influenced by price changes.
The demand curve and the law of demand are very important economic and statistical tools. They are used to determine the optimum price level of products at which the company may earn enough profits by selling the products while not affecting the consumer too much.
The demand curve is also an indicator of supply. When the demand is high, there is a need of increases supply and vice versa. So, the companies can understand the requirement of production levels by knowing the demand in the markets. This helps them to reduce wastage and produce goods that are enough to meet the demands.
Therefore, the law of demand is a handy tool for marketers as well as other professionals. It will remain a tool of importance forever.
Qns 1. Give some examples where the law of demand does not apply.
Ans. There are some situations in which the law of demand does not apply. In the cases of cases are Giffen goods, necessities, prestige goods, etc. the law of demand is not applicable.
Qns 2. What is the nature of the demand curve?
Ans. The demand curve is downward-sloping in nature.
Qns 3. How are the curves’ shapes in the case of perfectly elastic and inelastic demands?
Ans. In the case of perfectly elastic and perfectly inelastic demands, the demand curves are almost horizontal and vertical straight lines respectively.
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