The law of demand states: other conditions assumed to be constant (ceteris paribus), if the price of a commodity increases, the quantity that will be demanded at the price will be reduced and vice-versa.
The formal statement of the law of demand should contain the following points.
(i) Goods and services should be well-specified.
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(ii) Consumers should be willing to and capable of purchasing the product(s) they demand.
(iii) There should be opposite relationship between price of the product/service and quantity demanded.
(iv) Other determinants of demand should remain unchanged.
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Two reasons for this opposite relationship can be identified:
a) When the price of a commodity increases, the customers consume lesser quantity of the product, as their budget does not allow them to maintain the previous level of consumption.
b) Rise in price of a particular product may compel the existing customers to switch over to its substitutes, if available.
There are several variables, including price of the product, that influence the demand of a particular commodity. Some of these variables are prominent and can easily be identified, while the others, apparently having negligible influence on demand, sometimes play a crucial role in estimating the demand.
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These variables include: price of the substitute products, price of the complementary products, size of the market, income of the consumers, consumers’ tastes and preferences for the product, expected price of the product, advertising expenditure, etc. Thus, the demand function can be represented as:
Qd = f (P, Ps, Pc, T, A, Ac, Y, N, Pc…Etc.)
Where,
Qd = Quantity demanded of the product
P = Price of the product
Ps = Price of substitute product(s)
Pc = Price of complementary product(s)
T = Tastes and preferences of target group of customers
A = Expenditure on advertisement
Ac = Competitors’ expenditure on advertisement
Y = Income level of the target group of customers
N = Population size
Pe = Expected (future) change in price
The variables on the right-hand side of the functional representation are considered ‘independent variables’, and Qd is known as ‘dependent variable’ because Qd depends upon the change of each of the independent variables.
It is very important to note that the above functional presentation of demand does not include all the independent variable. Apart from these, (mentioned above), there may also be some other independent variables that influence the demand of a particular commodity.