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Trading and Investment Terms

Law of Demand

The law of demand works along with the law of supply to clarify how market economies allot assets and decide the prices of goods and services that we observe in ordinary transactions.

 

The law of demand states that quantity bought is inversely related to the price of the good. In other words, when price rises, quantity demanded falls, and when price falls, quantity demanded rises.

 

This happens as the law of diminishing marginal utility is in effect here. The Law Of Diminishing Marginal Utility states that everything else remaining the same, as consumption increases the marginal utility derived from every additional unit decreases.

 

That is, consumers utilize the first units of a good they purchase to fulfil their most critical needs first, and each additional unit of the good is used to fulfil successively lower valued ends that have a diminished utility.

 

There are 2 main exceptions to the law of demand:

 

1. Giffen goods: A Giffen good is a product that is bought by low income workers, and that defies law of demand in economics. When price of a giffen good rises, its demand also rises and when the price of a giffen good falls, its demand also falls. For example: Wheat is a normal good and bajra is a giffen good.

 

2. Luxury Goods: A Luxury or a Veblen good is a product that is bought for its luxury status, and that defies law of demand in economics. When price of a luxury good rises, its demand also rises and when the price of a luxury good falls, its demand also falls. For example: a car is a normal good but vintage cars that go for high prices come under luxury goods.

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