Law of Demand and Elasticity of Demand

In this article, we will have an understanding of the Law of Demand, and Elasticity of Demand. This topic is very important for the SSC exam as well as for other competitive exams. The law of demand provides a base for the overall understanding of the price & demand associated problems in an economy and also provides a conceptual theme to understand inflation as well. The topic always plays an important role in boosting your marks and especially a major role in SSC CGL EXAM and Banking exams of all levels.

Law of Demand

It states that the price and quantity demanded of any goods or services are inversely proportional to each other, keeping other factors constant. That means, that when the price of a product increases, the demand for the same product decreases.

The law of demand explains consumers’ choice behavior with changes in price. In the market, assuming other factors influencing demand as constant, when the price of a good/commodity rises, the demand for that commodity falls. This is natural consumer choice behavior. This happens because the consumer is hesitant to spend more on expensive goods.

For example, 

Suppose in any economy a commodity price was initially Rs 500/article which rises subsequently as 

P₂ – Rs 800 and P₁ – Rs 1000 due to various price-affecting factors and the rise in price ultimately led to the drop in demand that was initially Q₃ – 1000 articles to 
Q₂ – 700 articles and Q₃ – 500 articles as shown in the diagram.

The diagram shows that with an increase in the prices of a commodity from P₃ to P₂, the demand for that product decreases from Q₃ to Q₂ and vice versa.

The  Elasticity  of  Demand :

It refers to the percentage change in demand with the corresponding changes in one or more variables. Elasticity is an economic measure to determine the sensitivity of one economic factor to the changes in another. It is a measure to understand the sensitivity of demand to changes in other variables such as price, supply, etc. For example, a change in supply or demand with a change in price, or changes in demand with a change in income.

For example, in the above graph, when the price of a commodity increases from P₃ to P₁, the quantity demanded of a product decrease simultaneously from Q₃ to Q₁. 

Formulae   –    Elasticity of Demand  =  Percentage change in Demand / Percentage Change in Price

It is not necessarily the price factor of a commodity, it can be any factor affecting the demand, like – consumer income, consumer expectations, and preferences.

Quantity Demanded:

• Quantity Demanded is the number of goods or services a consumer or a group of consumers are willing to buy at a particular price at a given period of time. 
• Quantity demanded is always represented in terms of different quantities of different commodities with their respective different prices and that quantity is not for a single order to buy but for continuous purchases.

The graph given above represents the movement along the demand curve due to changes in price, i.e., the upward movement of the demand curve shows the contraction of demand. In contrast, the downward movement of the curve represents the enlargement of a set of demands.

Demand Vs Quantity Demanded :

Demand	Quantity Demanded
It is based on the desire of the consumer and his capability to afford the price of the commodities.	It refers to the specific quantity of a commodity that a consumer is willing to buy at a specific price quoted.
It includes the records of all the quantities that a consumer desires to purchase even at different prices.	Quantity demanded is the actual number of commodities a consumer is willing to buy at a specific price.
Changes in demand can occur due to factors other than price, e.g., changes in the price of the substitute product, etc.	Changes in the quantity of demand for a commodity take place due to price only.
Changes in demand will make the respective shift in the demand curve.	In this context, the change may result in movement along the demand curve.

Hence, clearly, we can conclude that when the price of commodity increases, the demand for that commodity decreases in general cases whereas when the price of a commodity increases, the demand for that commodity decreases.