SYJC - Economics Question Bank

Demand Analysis

Q1.A - Write Long Answers

1. State and Explain the Law of Demand. What are it's exceptions?

Answer-

  Statement of Law

"Other things being constant, higher the price of commodity, smaller is the quantity demanded and lower the price of the commodity, large is the quantity demand."

-Dr. Alfred Marshall

Explanation of the Statement 

Law of demand helps us to understand the behaviour of consumer with change in price. It explains functional (cause and effect) relation between price and demand

Dr.Alfred Marshall in his book, "The Principles of Economics" has stated the law of demand. This law explains day-to-experience of a common man's life.

The Law can be Mathematically expressed as,

Dx=f(P)  that is Demand is a function of price. Price and Demand has inverse relationship. Larger Quantity is demanded at lower price. Smaller Quantity is demanded at Higher Price.

If Price↑, Demand ↓ because Utility ↓ [Ability to Pay Decreases] 
    Price↓, Demand↑ because Utility ↑  [Ability to Pay Increases]

Assumptions

This law will be applicable only when certain assumptions are fulfilled

1) The level of income of a person must remain constant

2) Tastes and Habits of the people should not change

3) Prices of Substitute and Complementary Goods and Services must remain Constant

4) Quality of the Product remains constant

5) Size and Composition of Population remains constant

6) People do not expect changes in Future Prices

7) Supply of money remains constant

8) There is a stability in the economic growth rate

9) Policy of a government remains constant.

Schedule

Price

1

2

3

4

5

Units Demanded

50

40

30

20

10

Explanation

At Rs.1 consumer demands 50 units. When price rises to Rs.5, demand falls to 10. If price falls to Rs.2 demand rises to 40 units. An inverse relation between price and demand can be shown in the given diagram:

In the diagram, 'X' axis represents demand for the commodity, while 'Y' axis represents price of the commodity. DD is the Demand Curve. When Price of the Commodity is Op, demand for the commodity is OM. 

When Price rises to Q, Demand for the commodity