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Explain Law Of Demand And Factors Affecting Demand Economics Essay

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Published: Mon, 5 Dec 2016

The law of demand states that there is an inverse relation between the price of the given good and the quantity demand of the given good, other factors remaining constant.

When the price increases from p0 to p1,the quantity demanded decreases from OQ0 to OQ1, and vice-versa m other factors remain constant.

This shows that the demand of the given good is inversely related to the price of the given good.

The factors affecting demand of a good are:

Price of the good: if the price of the good increases, demand of the good decreases, and if the price of the good decreases, demand of the good increases, other factors remain constant.

Price of related goods : related goods are of three types-

Substitutes: the relation between the own good and the substitute good is positive in nature, i.e , if the price of the substitute increases, the demand for the own good increases, other factors remain constant.

Compliments: the relation between the own good an the complements are inverse in nature, i.e, if the price of the complement increases, the demand for the given good falls, and vice-versa , other factor remain constant.

Income of the consumer: When income of the consumer rises, demand for normal good increases while the demand for inferior good decreases and vice- versa , other factors remaining constant.

Taste of the consumer: If the consumer is in favour of the given good, then the demand for the given good increases while in the reverse scenario, the demand for the given good falls.

2. What are the factors affecting the elasticity of demand?

The factors affecting the elasticity of demand are:

Nature of the given good: If the given good is a luxury commodity, then it has an elastic demand, but if it is a necessity, it has an inelastic demand.

Availability of substitutes: a good having close substitutes will have an elastic demand while the other category of goods will have an inelastic demand.

Income of the consumer: if the income of the consumer is high, then the elasticity of the demand for that good is less, while if , the income is low, the elasticity of demand for that good will be more.

Time period: if the time period needed to find a substitute for the given good is more, the elasticity of the good is less and vice-versa.

Urgency of demand:If the demand for the good is essential, then the elasticity of the demand for that good will be nearly nil, while if the good is not essesntial, then it is elastic in nature.

Habituation: When the consumer get habitutated to the good, the change in price of the good will not affect his demand, that is, the demand will be inelastic in nature.

Number of uses: if the given good has more than one uses, then the elasticity of the given good will be less, and on the other hand, if there are only a very few uses, the demand for the good will be elastic in nature.

3.What are the different types of price elasticity of deman? Explain with diagrams.

There are five main types of price elasticity of demand:

Perfectly elastic (ed= )

When the demand for the given good increases or decreases to a great extent ,without any change in the price of the given good.

Relatively elastic demand: when the ratio of change in price is greater lesser the ratio of change in demand of the given good, it is said to have a relatively elastic demand.

When price increases from P0 to P1, the quantity demanded falls from Q0 to Q1.

Unitary elastic demand: when the ratio of change in demand is equal to the ratio of change in price, it is called to be unitary in nature, more prominanatly seen in the cass of normal goods.

When price increases from P0 to P1, quantity demanded also decreases from Q0 to Q1, hence the ratio being the same.

Relatively inelastic: when the ratio of change in price is greater than the ratio of change in demand, it is said to be relatively inelastic in nature.

When price decreases from P0 to P1, the quantity increases from Q0 to Q1 , but in a smaller ratio with respect to the former.

Perfectly inelastic:When the demand of a commodity does not change with respect to the drastic or negligible changes in price of the same good is called inelastic demand for the given good.

When price shifts from P0 to P1 or P2, the quantity demanded remains the same , that is Q0 is constant.

4.Explain the exception to law of demand.

The exceptions to law of demand are:

Giffen goods- they are those goods that are inferior in nature with very high negative income elasticity.

The demand for these good are shown with an upward sloping curve.

Eg:bajra,beedi etc.

Veblen good: these goods are purchased by consumers to assert their position in the society

In other words, the possession of goods in this category is somewhat more prestigious for them.

Eg: diamonds, luxury cars.

Price rise expectancy: If the price rises and buyer expects futher rise in price, the quantity demanded rises for that particular good, and vice versa

Eg: property shares, real estate, etc.

Emergency: In case of emergencies like war ,famine etc, the law of demand is not effective in such rare cases.

In such a situation, the confusion and psychological stress faced by the consumers forces them to demand for good, even at prices way higher than its original price.


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