The law of demand states that, other things remaining constant, the quantity demanded of a commodity increases when its price falls and decreases when its price rises.
Example: Consider the electric car market. A decade ago, very few purely electric cars were available, and those that existed commanded high prices. As electric car technology improved and more models entered the market, prices decreased. Consequently, the demand for electric cars increased as they became more affordable
It indicates an inverse relationship between the price and the quantity command demanded of a commodity.
The law of demand assumes that other things remain unchanged i.e. assumption of ceteris paribus order. It is because the demand for a commodity depends not only on its price but also on many other factors, like the consumer’s income, the price of the related goods, and the consumer’s tastes and preferences.
Exceptions to the law of demand: In a few cases, the law of demand in economics does not follow this rule. It happens when the demand for a particular product rises along with the price rise:
The law of demand does not apply to the commodities which serve as a status symbol i.e., Articles of Snob Appeal. These goods are demanded because of the enjoyment they give to their possessor from the feeling that other people envy him/her for possessing these high-priced items These goods remain exclusive so long as their prices remain high. For example, diamonds.
The law of demands does not work in the case of Giffen goods. When the price of Giffen goods rises, demand also increases due to income effects. For example, necessities like bread or rice.
If the price of a commodity is rising today, and it is likely to rise more in the future, people will buy more even at an existing higher price and store it up.
When consumers anticipate a large fall in the price of a commodity in the future, they will postpone their purchase even if the price falls today, to purchase the commodity at a still lower price in the future.
Law of the demand may not hold good during emergencies like war, famines, etc. At such times, consumers behave abnormally. If they expect a shortage of goods, they would buy even at high prices and hoard them.
Sometimes consumers assume that high-priced goods are of higher quality than low-priced goods.
LAW OF SUPPLY
The law of supply states that, with other things remaining constant, the quantity of any commodity that firms will produce and offer for sale rises with a rise in its price and falls with a fall in its price.
Example: Imagine a scenario where the price of wheat increases significantly due to a poor harvest. Farmers respond by planting more wheat crops to take advantage of the higher prices. As a result, the supply of wheat in the market increases, helping stabilize prices.
In other words, it states that the quantity supplied of a commodity and its price are positively related.
The law of supply assumes that other things remain constant. These factors determine the supply just like the price of the commodity. They include input prices, the technology of production, prices of related goods, taxation policies, goals of production, etc.
The law of supply can be illustrated with the help of a supply schedule and a supply curve. A supply schedule is a tabular representation of the law of supply and a supply curve is the diagrammatic representation of the law of supply.
Exceptions to the law of supply: There are certain commodities the supply of which cannot be increased or decreased at all. Thus, in the case of rare goods, such as classical paintings, old manuscripts, rare postage stamps, and old coins, the supply is fixed.
In some other cases, the supply may be fixed in the short run, and it can be increased in the long run. For example, in the case of wheat and other agricultural products, the supply is fixed once the crop is grown and the supply of it can be increased only in the long run.
There are certain cases when a smaller quantity would be offered at a higher price than at a lower price which defies the law of supply. This occurs in the case of labor supply. As the wage rate increases, the workers work for more hours, initially, to earn more income. He prefers labor over leisure. At a very high wage rate, the worker may be willing to work for a few hours to enjoy more leisure.
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