State and explain the law of demand with its assumptions.

Answer: The law of demand states the inverse relationship between price and quantity demanded.

Statement: Prof. Alfred Marshall stated: “Other things being equal, the higher the price, the lower the demand, and the lower the price, the higher the demand.” In short, \(D = f(P)\), with demand varying inversely with price.

Assumptions:

1. No change in the income of the consumer.
2. No change in the tastes, habits and preferences of the consumer.
3. No change in the prices of substitute and complementary goods.
4. No expectation of future change in prices.
5. No change in the size and composition of population.
6. No change in government policy, such as taxes.
7. The commodity is a normal good, not a Giffen or prestige good.

Explanation with schedule:

As price falls from ₹ 50 to ₹ 10, quantity demanded rises from 1 kg to 5 kg. [Diagram: price on the Y-axis and quantity demanded on the X-axis; plotting the schedule gives a demand curve DD sloping downward from left to right, showing the inverse relationship between price and demand.]

Why the demand curve slopes downward: law of diminishing marginal utility, income effect, substitution effect, new consumers entering the market at lower prices, and multiple uses of a commodity.

Conclusion: The law of demand is a qualitative statement: it shows the direction of change in demand but not its magnitude. It does not apply to exceptions such as Giffen goods, prestige goods, speculation and price illusion.