Explain the law of demand. Explain the law of demand; 7 reasons for down sloping from left to right 2022-10-14
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The law of demand is a fundamental principle of economics that states that, all other things being equal, the quantity of a good or service that consumers are willing and able to purchase decreases as the price of that good or service increases. This inverse relationship between price and quantity demanded is known as the demand curve.
The law of demand can be explained through the concept of utility, which refers to the satisfaction or pleasure that a consumer derives from consuming a good or service. When the price of a good or service increases, the utility that the consumer derives from consuming that good or service decreases, as they must give up a larger amount of money in exchange for the same quantity of the good or service. As a result, the consumer is less willing to purchase the good or service, and the quantity demanded decreases.
There are several factors that can affect the law of demand, including the availability and price of substitutes, the income of the consumer, and the consumer's expectations about future price changes. For example, if the price of a good or service increases and the consumer has access to a similar good or service at a lower price, they may choose to purchase the substitute instead, leading to a decrease in the quantity demanded of the original good or service. Similarly, if the consumer's income decreases, they may be less able to afford the good or service at its current price, leading to a decrease in the quantity demanded. Finally, if the consumer expects that the price of the good or service will decrease in the future, they may choose to wait to make their purchase, leading to a decrease in the quantity demanded in the present.
The law of demand is an important concept in economics because it helps to explain how the market determines the price of goods and services. When the demand for a good or service increases, the price will tend to rise, as sellers can charge a higher price for the good or service due to its increased popularity. Conversely, when the demand for a good or service decreases, the price will tend to fall, as sellers will need to lower the price in order to entice consumers to purchase the good or service.
In summary, the law of demand states that the quantity of a good or service that consumers are willing and able to purchase decreases as the price of that good or service increases. This inverse relationship is influenced by various factors, including the availability and price of substitutes, the consumer's income, and their expectations about future price changes. The law of demand plays a critical role in determining the prices of goods and services in the market.
Assumptions of Law of Demand (7 Points)
Speculation: The law of demand does not hold true when people expect the prices to rise still further. Because they value each additional unit of the good less, they are willing to pay less for it. They've got to stimulate demand when workers are losing jobs and homes and have less income and wealth. For example, diamonds, rare paintings, vintage cars, and antique goods are examples of Veblen goods. Image will be Uploaded Soon The above diagram contains a law of demand curve that is always downward sloping.
This effect of increase in the demand for tea is called as the substitution effect. What characteristics lead to a downward sloping demand curve? As mentioned earlier, the demand for a commodity or service not only depends on its price but also on several other factors such as price of related goods, income, and consumer tastes and preferences. Target Markets A target market consists of different groups of individuals, households, and organizations towards which a company aims to offer its products and services. Again, let the P x fall further. However, there are possible exceptions to the law of demand such as Giffen goods and Veblen goods. For example, speculation of market strategists on an increase in gold prices in the future induces consumers to purchase higher quantities in order to stock gold.
The number of buyers can also affect demand. The law of demand can help us understand why things are priced the way they are. It sets an expectation that prices will increase by 2% a year. Thus, there is an inverse relationship between price and quantity demanded. This may happen because the consumer is not aware about the price of the commodity at other places. The given price change is assumed to be final at a time. He understands how much demand will decline if the price of the commodity rises to a certain level, and how much demand will grow if the price of the commodity falls.
Quantity Demanded In economic thinking, it is important to understand the difference between the phenomenon of demand and the quantity demanded. A company adopts strategies to reduce costs or raise income to improve its bottom line. Thus, this increases the demand for the commodity. Supply Curve Supply curve represents the relationship between quantity and price of a product which the supplier is willing to supply at a given point of time. In the law of demand, other factors are assumed to remain constant while only the price of the commodity changes. Necessities:- Sometimes people buy more of a commodity at high prices due to ignorance. There are generally 7 types of demand.
Explain the law of demand; 7 reasons for down sloping from left to right
Importance of Law of Demand Price Determination - The study of law of demand is helpful for a trader to fox up the price of a commodity. Habitual Goods:If a person is habituated or addicted to certain goods, his demand for these goods will continue to be the same even if the price of such goods rises. This curve is the demand curve showing the inverse relationship between the price and the quantity demanded. Business experts can find out what demand is for a product before Penetrating That Market Market penetration is calculated as how much the customers are using the product or service compared to the total market for that product or service. In our example, because each additional bottle of water is used for a successively less highly valued want or need by our castaway, we can say that the castaway values each additional bottle less than the one before. Supply Chain A supply chain refers to a process beginning with the procurement of raw materials and the production of finished goods and ending with their distribution and sale. However, the limitations or the exceptions of the law of demand do not falsify general law which must operate.
Demonstration effect:- The tendency of the low-income group to imitate the consumption pattern of high-income groups is known as Demonstration effect. So the more units of a good that consumers buy, the less they are willing to pay in terms of the price. Law of Demand Exceptions In a few cases, the law of demand in economics does not follow the rule. The third bottle could be used for a less urgent need, such as boiling some fish to have a hot meal, and on down to the last bottle, which the castaway uses for a relatively low priority like watering a small potted plant to keep him company on the island. What is the normal slope of the demand curve? The demand schedule shows that as price rises, quantity demanded decreases, and vice versa.
The term is often used to describe the balance between supply and demand or, in other words, the perfect relationship between buyers and sellers. It behaves the opposite to the demand and supply theory. On the other hand, if the commodity becomes cheap then it can be utilized for all kinds of purposes, whether important or not. A good with a price far below what the market is willing to pay will appear toward the lower right — very low price, very high demand. Advantages of the Law of Demand in Economics There are several advantages of the law of demand, providing the opportunity for the traders, consumers, and other related parties.
State and explain the ‘law of demand’ with its exceptions.
Demand: Demand is the collective amount of commodities that customers or buyers have the will and the ability to buy at each price. Sir Robert Giffen observed this behaviour in England related to bread inferior good. The market demand schedule can offer information on overall market demand at various prices. If buyers expect prices of basic commodities to rise, some of them will buy more than what they need at present in order to take advantage of the lower price. It means that when the price of a good falls, the demand for the good rises and when price rises, the demand falls. People had limited money and so, they used to consume more bread a cheaper commodity and less meat a costlier commodity. We can graph these combinations of price and quantity demanded of X.