Law of demand establishes a relationship between the price and the quantity demanded of a commodity. Other things remaining the same, when the price of a commodity falls its demand will go up likewise when the price of a commodity rises its demand will fall. Price and demand move in opposite directions. There is no proportionate relationship between price and demand. A 10% fall in price will not necessarily lead to a 10% increase in demand. In the words of Marshall,

“The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or in other words, the amount demanded increases with a fall in price, and diminishes with a rise in price”. According to Samuelson,

“When the price of a good is raised, less of it will be demanded. People will buy more at lower price and buy-less at higher prices.” According to Meyers, “People demand a larger quantity of goods and services only it a lower price than at a higher price.” In simple words law of demand states that, other thing being equal, more will be demanded at lower, prices than at higher prices.

Law of demand can be shown with the help of the following table :

When price is 30 Paisa, consumer demand is 6 apples. When price falls to 20 Paisa, he demands 8 apples and when price goes to 40 Paisa he demands 4 apples. Thus when price falls, demand expands and -when price rises, demand contracts. Law of demand can – be shown with the help of the following diagram:

We see that at OP price our demand increases to OP1 the demand falls to OM1. When the price falls to OP2 the demand increases to OM2.

Causes : The law applies because of the following reasons

1. Law of Diminishing Marginal Utility : It is quite natural that when a person continues buying large number pf units of the same commodity, its marginal utility will progressively fall. On the other hand when the stock of a commodity goes on falling; then its-marginal utility will progressively rise. We also know that marginal utility is measured by price.

When a person purchases less amount of a commodity then the marginal utility of that commodity will be high for him and he will be ready to pay more price and vice versa. So we come to the conclusion that people purchase more at a low price and less at high price.

2. Income Effect : When price falls, real income of the consumer rises. He is therefore, in a position to purchase more units of commodity. When the price rises, real income of the consumer falls and he purchases less units of a commodity.

3. Substitution effect : When the price of one commodity falls people will purchase more of that commodity. When the price of one commodity rises people will purchase less of that commodity. The substitution effect of a price reduction is always positive and hence larger quantities will be bought at lower prices.

Assumptions of the Law :

The Law of Demand is based on the following assumptions :

1. Income of the buyer remains the same.

2. The taste of the buyer remains the same.

3. The prices of other goods—substitutes and complements— remain unchanged.

4. No close substitute is discovered.

5. There is no ‘prestige value’ for the product in question. Only when these conditions are assumed constant, the Law of Demand will operate. In other words, the tastes, incomes and the prices of substitutes and complements are main determinants of price relationship. Hence I they are assumed constant.