Question

Explain the Law of Demand. What are its assumptions?

Hint:

The Law of Demand is simple: Price up, Demand down. But it only works if everything else (income, tastes, other prices) stays the same.

Answer 1

The Law of Demand is a fundamental principle of microeconomics. The Law: It states that, \textit{ceteris paribus} (other things being equal), the quantity demanded for a good or service is inversely related to its price. In simpler terms, when the price of a good falls, its quantity demanded rises, and when the price rises, its quantity demanded falls. Assumptions: The law holds true only under certain conditions, which are known as its assumptions. The key assumptions are:

No Change in Consumer's Income: The income of the consumer is assumed to be constant. If income increases, a consumer might buy more of a good even at a higher price, violating the law.
No Change in Prices of Related Goods: The prices of substitute goods (e.g., tea and coffee) and complementary goods (e.g., car and petrol) are assumed to remain unchanged.
No Change in Tastes and Preferences: The consumer's preferences, habits, and fashion are assumed to be constant.
No Expectation of Future Price Changes: Consumers do not expect the price of the commodity to change in the near future. If they expect the price to rise, they might buy more now, even at a higher price.