Law of Demand: Assumptions and Exeptions

Assumptions to law of demand

The statement of the law of demand, demonstrates that that this law operates only when all other things remain constant. These are then the assumptions of the law of demand. We can state the assumptions of the law of demand as follows:

1. Income level should remain constant

The law of demand operates only when the income level of the buyer remains constant. If the income rises while the price of the commodity does not fall, it is quite likely that the demand may increase. Therefore, stability in income is an essential condition for the operation of the law of demand.

2. Tastes of the buyer should not alter

Any alteration that takes place in the taste of the consumers will in all probability thwart the working of the law of demand. It often happens that when tastes or fashions change people revise their preferences. As a consequence, the demand for the commodity which goes down the preference scale of the consumers declines even though its price does not change.

3. Prices of other goods should remain constant

Changes in the prices of other goods often impinge on the demand for a particular commodity. If prices of commodities for which demand is inelastic rise, the demand for a commodity other than these in all probability will decline even though there may not be any change in its price. Therefore, for the law of demand to operate it is imperative that prices of other goods do not change.

4. No new substitutes for the commodity

If some new substitutes for a commodity appear in the market, its demand generally declines. This is quite natural, because with the availability of new substitutes some buyers will be attracted towards new products and the demand for the older product will fall even though price remains unchanged. Hence, the law of demand operates only when the market for a commodity is not threatened by new substitutes.

5. Price rise in future should not be expected

If the buyers of a commodity expect that its price will rise in future they raise its demand in response to an initial price rise. This behavior of buyers violates the law of demand. Therefore, for the operation of the law of demand it is necessary that there must not be any expectations of price rise in the future.

6. Advertising expenditure should remain the same

If the advertising expenditure of a firm increases, the consumers may be tempted to buy more of its product. Therefore, the advertising expenditure on the good under consideration is taken to be constant.

Exceptions to the law of demand

Law of demand has the below exceptions and is not applicable to below cases:

1. Apprehensions about the future price

When consumers anticipate a constant rise in the price of a long-lasting commodity, they purchase more of it despite the price rise. They do so with the intention of avoiding the blow of still higher prices in the future. Likewise, when consumers expect a substantial fall in the price in the future, they delay their purchases and hold on for the price to decrease to the anticipated level instead of purchasing the commodity as soon as its price decreases. These kinds of choices made by the consumers are in contradiction of the law of demand.

2. Status goods

The law does not concern the commodities which function as a ‘status symbol’, add to the social status or exhibit prosperity and opulence e.g. gold, precious stones, rare paintings and antiques, etc. Rich people mostly purchase such goods as they are very costly.

3. Giffen goods

If there is an inferior good of which the positive income effect is greater than the negative substitution effect, the law of demand would not hold. For example, when the price of potatoes (which is the staple food of some poor families) decreases significantly, then a particular household may like to buy superior goods out of the savings which they can have now due to superior goods like cereals, fruits etc., not only from these savings but also by reducing the consumption of potatoes. Thus, a decrease in price of potatoes results in decrease in consumption of potatoes. Such basic good items consumed in bulk by the poor families, generally fall in the category of Giffen goods.

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One response

  1. Very interesting. I have recently started examining a lot of core economic assumptions and thinking about them in a new way. It is not as clear cut as the textbooks make out.

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