Definition of The Law of Demand
The law of demand states that other things remain the same, a decrease in prices causes an increase in demand and an increase in prices causes a decrease in demand. This law is based on The Law of Diminishing Utility which states that as we keep purchasing a commodity its marginal utility keeps declining and due to this only, the consumer pays a lesser price for it.
In the words of Prof. Marshall,
With a decrease in. prices of a commodity its demand increases and with an increase in prices demand decreases.
Suppose the relation between demand and prices of bread in the market is the following
|Price of Bread (INR)||The demand for Bread (in Units)|
In the above table when the price of 1 bread is ₹6, its total demand is 10 units but as the price decreases to ₹4, its demand increases to 20 units. Similarly, after that in the table, the prices have been falling and demand has been increasing.
Why do most demand curves slope downward to the right?
Operation of the Law of Diminishing Marginal Utility
The law of demand is based on The Law of Diminishing Utility. This law states that as the consumption of any commodity increases, the utility derived from every next unit diminishes. Ordinarily, no consumer will be ready to pay more price than the marginal utility derived from the commodity. On the purchase of more and more units of the same commodity, its utility starts declining. Thus, any consumer buys more units of the same commodity only when its price has decreased. In other words, a reduction in the price of a commodity brings about an increase in its demand and as a result, the demand curve slopes from left to right downwards.
When the value of a commodity decreases, it becomes more attractive than its substitutes (whose prices have not decreased) and the consumers start consuming this commodity instead of any others. This is called Substitution Effect.
In this way, with a fall in prices, the demand for a commodity increases due to the substitution effect. For example, on decreases in the prices of coffee as compared to tea, in the market, people start consuming more amounts of coffee, and the increase in the demand for coffee will be due to the substitution effect. In this way, with a fall in prices demand increases and the demand curve slopes downwards from left to right.
When there is a reduction in the price of a commodity, the real income of a consumer increases because now he has to spend less on that commodity as compared to its previous value. As a result of this saving in income, he can utilise a part of it. in purchasing more amount of that commodity. Due to this reason, the increase in demand for a commodity is called ‘Income Effect. On the contrary, an increase in the price of a commodity, decrease the real income of the consumer and he has to reduce his consumption of that commodity. In this way, Income Effect explains the law of demand. In other words, Income Effect tells why the demand curve slope downwards from left to right.
Change in the Number of Buyers
When the price of a commodity decreases, some other people who never purchased the commodity earlier, start using it. On the contrary, on an increase in prices, some people who used to purchase that commodity, stop buying it. This fact also explains why, the shape of the demand curve downwards from left to right.