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Assumptions and Limitations of the Law of Demand

The assumptions of the law of demand are key pillars to realize or implement the law of demand in the market.

There are many assumptions of the law of demand but most important of them are hereunder which are discussed by most of the economists when they talked about the law of demand.

Before reading the assumptions of the law of demand it is recommended that you should understand the difference between demand and quantity demanded. 

Assumptions of the Law of Demand

1. Income of the individual/consumer remains the same or constant

The basic assumption of the law of demand is about income because it is directly related to price. In simple words, the income of the individual directly affects the quantity demanded that’s why it should remain constant while studying the law of demand.

If the income of an individual increase it directly positively affect the quantity which leads to shifting in quantity demanded. Therefore, when studying the implementation of the law of demand income should be kept constant.

2. Preference and Tastes of the consumer remain the same or constant

The law of demand talked about the individual quantity demanded against the different levels of price so the second assumption of the law of demand is that same/constant preferences and tastes of the consumer towards the product. If the preferences and tastes of the consumer vary that will directly affect the demand for the product.

3. Nonapplication on Necessities of life

It is assumed that the law of demand is not applicable to the basic necessities of life e.g. wheat. The increase in the price of wheat does not much affect its demand and vice versa.

4. Goods with Joint demand

This law is not applicable to the goods which have joint demand because of an increase in the price of one commodity leads to a decline in the quantity demanded of another commodity. For example, pen and ink, an increase in the price of the pen lead to a decline in quantity demanded of the ink.

In simple words, when the price of the pen increases the quantity demand of the pen decreases which also decreases the quantity demanded of ink. Keep in mind, here the ink has an indirect relation with the price of the pen.

5. Fashion remains constant or Fashion does not change

When studying or applying the law of demand it is also assumed that the fashion of a particular product does not change.

This assumption mostly assumed in the case of electronics and clothes industry because of these both industries shift the demand when change comes in their fashion.

6. Size of Population remains the same

It is also assumed that the population size of the sample should remain the same when studying the law of demand. Sample means the area of study it may be colony, city, or even a country.

The change is population directly impact the quantity demanded which leads to shifts in the demand curve.  Keep in mind, its short-run phenomena.

7. Price of substitutes do not change

It is also the vital assumption in assumptions of the law of demand, which states that the price substitute does not change during its study. Therefore, the price of substitutes should remain the same.

For instance, take an example of apple and banana both are substitutes. If the price of banana increases then its demand decreases and consumers shift towards the apple and demand demanded of apple increases.

8. Expensive Products or Articles which create distinctions in society

The law of demand does not hold in case of articles of distinction or in case of expensive/luxury products for example diamond etc. the higher the price of diamond the more people who are able to buy it will buy more.

9. Anticipation of shortage or price increase in the near future

In case of the anticipation of rising in the price level or shortage leads to the storage, and suddenly the prices increases but people continue to buy products. So in this case law of demand does not hold.

10. Market Knowledge

Sometimes consumers have no knowledge of the particular product and even buy it at higher rates. In this case, the law of demand does not hold.

All of the above-mentioned assumptions are important for the implementation of the law of demand in any market.

The assumptions of the law of demand sometimes known as pillars of the law of demand.

The assumptions when neglecting or not supporting the law of demand is known as limitations of law of demand. Some assumptions became limitations when we reject them. For example, we take constant income of the consumer as assumption of the law of demand but when it varies it become limitation of law of demand.

Muhammad Waqas Khalid
About Him: He has done Master of Philosophy in Economics in 2016 by paying special attention to the development of research skills. He has worked as a Research Associate at the London School of Economics. He has 6 years of experience in writing. He has published many research articles and some of them got published in impact journals too. Check his work at Google Scholar: https://scholar.google.com/citations?user=RiGg9YIAAAAJ&hl=en His Expertise: He has both quantitative and qualitative expertise. He has command over different statistical packages/software i.e. SPSS, Eviews, STATA, Microfit, MS Excel, etc. and He is willing to help you out in your assignments or thesis etc.
http://www.beingeconomist.com

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