Question

Explain the law of demand and its exceptions.

Answer 1

The law of demand was first stated by Augustin Cournot in 1838. Later it was refined and elaborated by Alfred Marshall.

Definition:
The law of demand says as “The quantity demanded increases with a fall in price and diminishes with a rise in price” -Marshall
Assumptions of the law:

1. The income, taste, habit, and preference of the consumer remain the same.
2. No change in the prices of related goods.
3. No substitutes for the commodity.
4. The demand for the commodity must be continuous.
5. No change in the quality of the commodity.

If there is change even in one of these assumptions, the law will not operate.
Demand schedule:

Price (Rs)	Quantity Demanded
5	1
4	2
3	3
2	4
1	5

From the above schedule if the price of the good is 5 then the quantity demanded is 1 unit and if the price decrease to 1 quantity demanded raises to 5 which shows the inverse relationship between price and quantity demanded.

Diagram:

Quantity Demanded (in units)

In the above diagram, X-axis represents the quantity demanded and Y-axis represents the price. DD is the demand curve that has a negative slope. It indicates that when the price falls, the demand expands and when the price rises, the demand contracts.

Market demand for a commodity:

^{The market demand curve for a commodity is derived by adding the quantum demanded of the
commodity by all the individuals in the market.}
Exceptions to the law of demand:

1. There are some unusual demand curves that slope upwards from left to right. It is known as the exceptional demand curve.
2. In the case of an exceptional demand curve, a fall in price brings about contraction, and a rise in price brings about the extension of demand.

Reasons for exceptional demand curve:

1. Giffen paradox
2. Veblen or demonstration
3. Ignorance
4. Speculative effect
5. Fear of shortage