Question

Explain the law of demand and state its assumptions.

Answer 1

Law of demand:

• The principle that explains the relationship between price and demand for a good, assuming the effect of all other determinants as constant is called the ‘Law of Demand’.
• This law was given by Prof. Alfred Marshall As per him “When other factors influencing demand remain unchanged, if price of a good falls, its demand expands and if price of a good rises, its demand contracts.”
• Thus, the law expresses an inverse relationship between price and demand.
• In this law, ‘price’ is the cause variable and demand is the effect variable.

Assumptions of law of demand:

• Tastes and preferences of the consumer remain unchanged.
• Income of consumer remains unchanged.
• Price of substitute and complementary goods remain unchanged.
• Consumers do not make anticipation regarding future prices.
• Size of population remains the same.