Assumptions of the Law of Demand

Assumptions of the Law of Demand

The Law of Demand If other things remain constant’ is an important clause of the law of demand. This clause means that the law will apply if certain conditions are met. This law is based on the following assumptions –

1. There will be no change in the occupation and choice of the consumer.

2. There will be no change in the income of the consumer.

3. There will be no change in the price of the goods concerned.

4. There should be no substitute for the commodity demanded.

5. The demand for the commodity should remain constant.

6. The transaction or trade situation should remain constant.

7. There should be no mark of any level or prestige level on the commodity demanded.

8. No individual user should be in a position to make a change in the price.

9. There should be no change in the distribution of income among consumers and the accumulation of wealth to fix the income of the consumer.

Why is the demand factor to be sought downwards?

There is a negative trend of demand curve? That is, it is sagging downwards. There can be many reasons for this downward sagging of demand curve

1. Diminishing marginal utility – The demand curve slopes downwards because the law of demand is based on the law of diminishing marginal utility. As a consumer buys more and more of a commodity, the marginal utility of additional units falls. Therefore, the consumer is willing to pay less for additional units. Hence, the demand curve slopes downwards.

2. Income effect – When the price of a commodity falls, other things remaining the same, the real income of the consumer increases. As a result, his purchasing power increases because now he has to pay less for a given quantity. Due to the increase in real income, the consumer is encouraged to demand more goods and services. The increase in demand due to increase in real income is known as income effect.

However, it should be noted that in the case of inferior goods, the income effect will be taken as negative. If the price of an inferior good falls considerably, then the real income of the consumer increases and he becomes relatively rich.  As a result, he substitutes high quality goods in place of low quality goods. This reduces the consumption of low quality goods. In this way, the income effect on demand for low quality goods becomes negative.

3. Substitute effect When the price of a commodity falls and the substitutes remain constant, the substitutes become comparatively expensive. Or in other words, the commodity whose price falls becomes comparatively cheap. Since utility is provided by cheap goods as a substitute for expensive goods, the demand for cheap goods increases. The increase in demand due to this element is called substitute effect.

4. Change in the number of consumers- When the price of a commodity falls, it starts reaching those houses also who were not able to buy it earlier due to its high price. Due to the fall in price, they get an opportunity to give the form of demand to their desire. Similarly, when the price increases, the number of consumers decreases.  Demand of a commodity: Since it is inversely related to its price, the demand curve always slopes downward from left to right.

5. Different uses of a commodity If a commodity is used for many purposes, then an increase in its price affects its demand.

For example, many works are done with electricity. If the price of electricity increases, then the consumer will use it for limited purposes only. On the contrary, if its price falls, the consumer will easily use it for various purposes without hesitation.

6. Psychological effect – Psychologically, people buy more goods when the price falls. Hence, the demand curve goes downward.