Question

What are the assumptions of the Law of Demand?

Mention two assumptions of the law of demand.

Explain in brief the ceteris paribus assumption of the law of demand.

State two assumptions to the law of demand.

Answer 1

The law of demand is based on the following assumptions :

1. Constant level of income: If the law of demand is to find true operation, then consumers' income should remain constant. If there is a rise in income, people may demand more at a given price.
2. No change in the size of the population: It is assumed that the size of the population remains unchanged. Any change in the size and composition of the population of a country affects the total demand for the product.
3. Prices of substitute goods remain constant: It is assumed that the prices of substitutes remain unchanged. Any change in the price of the substitute will affect the demand for the commodity.
4. Prices of complementary goods remain constant: It is assumed that the prices of complementary goods remain unchanged because a change in the price of one good will affect the demand for the other.
5. No expectations about future changes in prices: It is assumed that consumers do not expect any further change in price in the near future. If consumers expect a rise in prices in future, they may demand more in the present even at existing high prices.
6. No change in tastes, habits, preferences, fashions etc.: It is assumed that consumers' tastes, habits, preferences, fashions etc. should remain unchanged. Any change in these factors will lead to a change in demand.
7. No change in taxation policy: The taxation policy of the government has a great impact on the demand for various goods and services.

Answer 2

Assumptions of the law of demand: The law of demand is based on the assumption Ceteris Paribus which literally means other things remain equal, e.g.,

1. Prices of related goods remain unchanged.
2. Consumer's income is given and remain constant.
3. Tastes and preferences of the consumers remain unchanged.

Answer 3

Law of demand holds good when other things remain the same. It implies factors influencing demand other than commodity's own price are assumed to be constant. The main assumptions of the law are as follows:

1. Tastes and preferences of the consumers remain unchanged.
2. There is no change in the income of the consumers.
3. Prices of the related goods do not change.
4. Consumers do not expect any change in the price of the commodity in the near future.