Saturday, 2 January 2016

Law of Demand, demand schedule and demand curve

The law of demand states the relationship between the price of a commodity and the quantity demanded of it. It studies and explains the spending and purchasing habits of consumers at any time.

Whereas suppliers of goods and services tend to increase supplies of their product into market as a result of the increase in prices, the consumers tend to react inversely. Consumers begin to shrink their demand for those goods and services whose prices begin to increase.

This decrease in demand happens because, consumers have to make purchases from within their own financial capacities. Naturally, they tend to curtail their purchases of costly items and shift their attention towards lower cost commodities.

The law of demand is based on this trend of the decreasing demand for goods and services whose prices are spiralling upwards. It assumes that other factors remaining same, changes in prices will result in changes in demand.

So, the law of demand and law of supply are inversely related to each other.

The law of demand definition
Law of demand states that, other factors remaining constant, as the price of a good or service increases, the consumer demand for it will decrease. So, according to this law of demand, the price of a commodity and quantity demanded are inversely related to each other. If the price rises, demanded quantity will decrease and if the price falls, demanded quantity will increase.

  • The demand for any commodity is expressed as at a given price and as at a particular time or for a given period of time.

What is demand schedule
Demand schedule is a chart showing various prices of the commodity and the quantities demanded of it at each price range.

Let me give an example here.
Suppose a consumer goes to purchase Sugar. He buys 5 kg sugar when the price is at Rs.30 per kg. Suppose the price increases to Rs.40. Then he will buy only 4 kg. and if the price further increases to Rs.50, he will be buying only 3 kg. As the price goes on increasing, he will go on decreasing his quantities of consumption. Or, conversely, when the prices fall, he will be increasing the quantities of his purchases. The same thing can be represented in the demand schedule as below.

Demand Schedule for Sugar                                                      
Price of sugar
Qty. of demand
5 kg
4 kg
3 kg

The above example is for a particular person's  individual demand. So, if we consider the demand of other people also for the commodity of Sugar, then it will be deemed as the total market demand for sugar. Suppose there are 10 people and each one demand various quantities at each price level. Then, you will have to add all the quantities demanded by all people for each price level to know the total demand at each price level. This is known as market demand for sugar. 

Demand Curve
A demand curve is a graph representing the relationship between price of a commodity and the quantity demanded by consumers at each price level of that commodity. It is a graphical representation of the demand schedule.

So, from the above figures of demand for sugar at different prices, we can prepare the demand curve as shown in the figure below.

Demand Curve for Sugar

In the above figure drawn with hand by me, the demand curve is the slant line at the top right hand corner of the image. It slants downwards because, with every increase in price the demand comes down.

Regarding factors affecting supply and demand, you may view for details at this link.

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