In economics, a desire of a person cannot become want unless he has purchasing power and willingness to purchase. Suppose, a person who is willingness to buy a mobile phone but he has no money to buy it, his desire of a mobile phone cannot be referred to demand. Similarly, if has the money to buy the mobile phone but is not willing to buy it, his ability to buy the mobile phone alone cannot be referred to demand in Economics. He must have purchasing power and willingness to purchase for demand of anything.
Demand and Quantity Demanded
There is a difference between demand and quantity demanded. Demand refers to overall demand for a good or service. While quantity demanded is the specific quantity of a good that consumers are willing to buy at a given price. Technically, demand is the demand curve while quantity demanded is the specific point on the demand curve.
Individual and Market Demand
Individual demand is the quantity of a commodity that a single person is willing to buy at a given price over a specific period of time. On the other hand, market demand is the total quantity of a commodity that all individuals in the market are willing to buy at a given price over a specific period of time. In other words, it shows the sum of all individual demands.
Law of Demand
The law of demand represents an inverse relationship between price and quantity demanded of a good. If the price of a good falls, the quantity demanded increases. Conversely, if the price of a good rises, the quantity demanded decreases while other things remaining unchanged in both cases. The law of demand can be explained with the help of a demand schedule and a demand curve.
The demand schedule shows as the price of per kg apple is decreasing, its quantity demanded increases. We can see when the price of per kg apple is Rs. 100, its quantity demanded is 200 kg. When the price decreases from Rs. 100 to Rs. 90, its quantity demanded increases from 200 kg to 300 kg. As the price further falls, its quantity demanded further rises. If we observe the demand schedule from bottom to top, we can understand as much as the price is increasing, the quantity demanded is decreasing.
Now we will illustrate the law of demand with the help of a diagram.
In the above figure (1.5), price of apple per kg on x-axis and quantity demanded on y-axis are measured. DC is the demand curve which is sloping downward from left to right. The demand curve (DC) is representing that as the price of apple is decreasing, its quantity demanded is increasing and vice versa.
Assumptions of The Law of Demand
The law of demand is based on the following assumptions:
1. The income of the consumer must remain constant.
2. There should be no expectation of future prices.
3. There should be no change in tastes, preferences and custom of the consumer.
4. The price of related commodities must remain unchanged.
5. The size of population must not change.
If any of the assumption is maintained, the law of demand will not work.
Exceptions of The Law of Demand
Under the following situations the law of demand does not apply:
Rare goods: The law is not applicable in case of rare goods such as historical paintings, and diamonds which are very expensive. When their prices are increased, their value is also increased which lead to raise their demand.
Inferior goods: The law of demand also does not apply to inferior goods. When the price of an inferior goods go down, their demand further reduced than before. This is so because when the price of inferior good falls, the purchasing power of people increased which lead them to buy expensive and superior good instead of inferior quality of good.