Law of Demand: Characteristics and Exceptions to It Management YouTube Lecture Handouts

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Law of Demand: Characteristics and Exceptions to It Management

The Law of Demand

  • It was given by Alfred Marshall in his book, “Principals of Economics” in the year 1890.
  • The laws says that other factors being constant (cetrisperibus) , price and quantity demanded of any good and service are inversely related to each other. When the price of a product increases, the demand for the same product will fall.
  • Qx = f (Px; Y) where Q is quantity demanded and f is the demand function and P is the price of the good.

Concept of Diminishing Marginal Utility

  • Every good consumed by a consumer has got a utility attached to it. The law of diminishing marginal Utility states that all else equal as consumption increases the marginal utility derived from each additional unit declines
  • Utility is an economic term used to represent satisfaction or happiness. Marginal is the incremental increase in utility that results from consumption of one additional unit.
Concept of Diminishing Marginal Utility

Characteristics of the Law of Demand

  • Inverse Relationship: If the price of a good increases, its demand decreases and vice versa.
  • Price is independent and demand is dependent variable: Price is independent as it due to change in price, quantity demanded changes not due to any other factors.
  • Other things being equal: This is an assumption of the law that apart from price, other things like income, price of substitute goods and complimentary goods etc. remain same.
  • Concerned with certain period of time: It means that there is a particular time attached to it. For example, weekly, monthly, yearly etc.

Exceptions to the Law of Demand

  • Inflation or Deflation: When the price rises or falls due to any economic reasons, the law of demand fails. For example, if there is deflation due to corona, then no matter whether price rise or fall, demand will always be less.
  • Conspicuous or Veblen Goods: These are the items which are costly and therefore when their price rises, they are demanded more by the elite.
  • Giffen Goods: These are basically slightly inferior goods but they don՚t have close substitutes. If their price rises, then their demand also rises as they don՚t have substitutes.
  • Ignorance: If the customer is ignorant regarding the price, then law of demand does not work. If customer does not know the prices going in the market, then obviously he or she will buy at the offered prices

MCQs

Which among them is purchase to increase prestige?

1. Giffen Goods

2. Demonstration goods

3. Goods of distinction

4. Decorative items

What among the following is not an exception to the law of demand?

1. Situation of crisis

2. Necessities

3. Tracking the prices

4. Giffen goods

Manishika