Exceptions to the Law of Demand

Under certain circumstances, consumers buy more when the price of a commodity rises and less when its price falls. In such cases, the demand curve slopes upwards from left to the right, i.e., it has a positive sloppe. These cirumstances are known as exceptions are known as exceptions to the law of demand. The main exceptions are as follows:

Law of Demand

It is a general experience that demand for a commodity is more at lower price than at a higher price. There is inverse relationship between price and quantity demanded. This inverse price-demand relation is known as the law of demand. Hence, the law of demand shows the direction in which quantity demanded changes with a change in price.

In Marshall's words,"The amount demanded increases with a fall in price, and diminishes with a rise in price."

In the words of Prof. Samuelsion, "Law of demand states that people will buy more at lower prices and buy less at higher price, other things remaining the same."

The phrase 'other things remaining the same' points towards certain important assumptions on which this law is based. These assumptions are:

• No change in income of the consumer;


• No change in the price of related goods;


• No change in the taste, nature and fashion of the consumers;


• No change in climate and season;


• No change in size and composition of the population;


• No exception of further changes in the price of the commodity.

Given these conditions, the law of demand can be explained with the help of table and diagram. It must be remembered that the law of demand is always expressed through market demand schedule and market demand curve.

Kinds of Demand

The following are the types of demand:

• Price Demand

Price demand expresses a relationship between price and quantity demanded. It refers to the various quantities of a commodity that a consumer would purchase at its different prices at a given time, keeping all other things constant. The quantity demanded increases with the fall in price and falls with the rise in price.

• Income Demand

Income demand expresses the relationship between income and demand, keeping all other things constant. It refers to the various quantities of a commodity that would be purchased by a consumer at different level of income. The relationship between the income of the consumer and his demand is positive, i.e. the demand increases with the increase in demand and vice-versa.

• Cross Demand

Cross demand expresses the relationship between the demand for one commodity, say X and the price of the related commodity, say Y. It indicates how much quantity of X commodity will be demanded at different prices of Y commodity, without any change in the price of X commodity.

• Direct Demand

Direct demand refers to the demand for a commodity not for its direct consumption to satisfy a human want directly. For example, the demand for a car is a direct demand and it satisfies the final consumption demand.

• Derived Demand

Derived demand refers to the demand for a commodity not for direct satisfaction but making final product. It is also called indirect demand. Derived demand depends upon direct demand. For example, the demand for a building is a direct demand and the demand for bricks, cement, rod, wood, etc. required to make the building are known as the derived demands.

• Joint Demand

It is also known as complementary demand. Joint demand refers to that demand when two or more commodities are demanded together to satisfy a common want. For preparing tea, we need milk, sugar and tea leaves.

• Composite Demand

Composite demand refers to the demand for one commodity which can be put to several uses. For example, milk can be used for making sweet, tea, butter, etc. Therefore, demand for milk is a composite demand.

Demand

Meaning of Demand

In common language, 'demand' and 'desire' are used as synonymous. But in economics, demand implies more than mare desire. The demand for a commodity is its quantity which consumers are able to willing to buy at various prices during a given period of time. A beggar's desires to travel by air from Dang to Kathmandu has no significance as he cannot pay for it. On the other hand, a businessman's desire to go to Kathmandu by an aeroplane is demand as he is able to pay for it, and willing to do so. Thus, demand means desire backed by willingness and ability to pay.

Both willingness and ability to pay are essentile for demand. If a man is willing to pay but he is unable to pay, his desire will not become demand. In the same way, if he is able to pay but is not willing to pay, his desire will not the same way, if he is able to pay but is not willing to pay, his desire will not be charged into demand. In order to change desire into demand, it is necessary that he should have both willingness and ability to pay for it. Thus, demand refers to effective desire which implies three things:

• Desire for a commodity;
  
• Willingness to pay for it; and
  
• Ability to pay for it.
  

This makes it clear that a want or desire does not become demand unless it is backed by above mentioned three things.

Different economists have defined the term demand in different ways. Some are as follows:

According to Prof. Marshall,"Demand refer to the quantities of a commodity that the consumers are able and willing to buy at each possible price during a given period of time, other things being equal."

In the words of Bober,"By the demand we mean the various quantities of a given commodity or services which consumer's would buy in one market in a given period of time at various prices."

In simple words, demand means the quantity of goods and services which consumers would buy in a market at given price and time.
Thus, there are necessary for demand to exist:

1. the price of the commodity;
2. the amount of a commodity; and
   
3. per unit of time.
   

Disadvantages or Demerits of Market Economy

Market economy has been severally criticized by many economists on the following grounds:

• Economic Instability

The main drawback of a market economic system is that it does not guarantee economic stability. In the lack of any external control, this economy is subject to the frequent ups and downs in the levels to production, income, employment, prices, trade, etc. As a result, prices, unemployment, etc. may increase and uncertainly may prevail in the economy.

• Class Struggle

Another defect of market economy is that it divides the entire society into two classes- the rich and the poor, or the owners (employers and employees) and workers, or haves and haves-not. These two classes always fight with each other because of the clash of their interests. There is always a struggle between those two distinct classes.

• Wasteful Competition

There is a wasteful competition in a market economy. A large sum of money is wasted on competitive advertising a product in a newspaper, on radio and T.V., in cinema, etc. Form a consumer as well as social point of view, selling costs are sheer wastage because the resources of the society are wastage and consumers have to bear the burden of selling costs in the form of higher prices.

• Failure to Market Mechanism

In an underdeveloped economy, market mechanism cannot guarantee rapid and sustained economic growth and removal of poverty and unemployment. Free market forces cannot guide infrastructure, capital goods industry, etc. Moreover, saving and investment which are essential for higher growth cannot be raised simply by free market forces of demand and supply.

• Monopoly Tendencies

A major defect of market economy is that the monopoly tendencies are developed in the country. Gradually competition declines and the large firms try their level best to eliminate the rival firms through various means and emerge as big monopoly houses. Labors are being exploited by the bog industrialists and consumers are charged higher prices.

• Business Fluctuations

All major countries of market economic system of the world are suffering from the problem of business fluctuations. In the lack of any control, booms and depressions occur very frequently in these economics. The resources of the economy are not fully utilized.

• Exploitation of Workers

Another defect of a market economy is that the workers or labors are exploited by the markets. Therefore, it causes a good deal of human misery and sufferings. The workers are paid less than their marginal productivity and are paid wages just sufficient for their bare survival. In this regard, Karl Marx has pointed out, "Market Economy contains the seed of its own destruction."

In brief, a market economic system gives more importance to the private ownership of property, competition, consumer's sovereignty, and least government interference in the economic activities. But at the same time, it contains certain evils too. Many welfare states have taken certain measures to curb these evils through certain welfare measure. In this way, the role of government is also increasing.

Advantages or Merits of Market Economy

The following are the main features of market economy:

• Economic Efficiency

Competition is the o find out new techniques of production in order to reduce economic wastage and to increse economic main basis of market economy. The competition among producers inspires every producers to produce cheaper and better quality goods. This leads to economic efficiency. Every effort is made efficientcy.

• Better Living Standard

The persons of all income groups enjoy a better standard of living in a market economy. They have more income, more leisure, more comforts and more luxuries than the people of any other economic system. Goods and services are within the reach of even poor people. The best quality goods at responsible prices have in fact improved the standard of the people in a market economy.

• Efficient use of Economic Resources

In a market economy, wastage of any economic resources means losses. At the same thime, efficient use of economic resources increase production and hence profits. Sp everu effort is made to put the available resources to the best and optimum use.

• Intensive to Work

Everyone gets adequate incentives to work in a market economy. Ownership of private property, laws of inheritance and hope for profits and better wages inspire everybody to work hard and earn more and more income under market economy.

• Economic Freedom

Economic freedom is the basis of market economy. There is a freedom of consumption, production and enterprises. Everybody is free to spend on anything and in any way. There is a freedom to save and invest up to any extent. Every producer is free to produce any commodity he likes. Thus, economic freedom is the backbone of market economy.

• Flexibility and Automatic Operation

A market economy is a flexible economy. It changes itself quickly as per circumstances. The market economy is an automatic system. There is no external authority or planning board to regulate the fuctioning of a market economy. Prices of goods and services are determined automatically through demand and supply forces. There is an 'invisible hand' of price mechanism which solves all the central economic problems.

• Rich Variety of Goods and Services

In a market economy, a consumer is a king. Goods and services are produced as per his chice and liking. So, different types of goods and services are produced in tune with the test of different consumers. In this way, the producers also enjoy maximum profits.

• Economic Growth

Market economy has promoted rapid economic growth. The economics such as USA, UK, Japan, France, etc. are enjoying the high rates of economic growth much due to the market economic system. The market economics have been very rich and affluent in the world.

Basic Concept of Market Economy

Meaning of Market Economy

A market economy is an economic system which resolves basic economic problems mainly through the market mechanism. Market economy is also known as the capitalist or free enterprise economy. Mainly, there are three basic economic problems. What, how and for whom to produce. These economic problems are resolved by market mechanism. Market mechanism means the allocation of resources through the interaction between demand and supply.

According to Professor Loucks,"Capitalism is a system of economic organization featured by the private ownership and the use for private profit of men-made and nature-made capital." It is clear from this definition that under the capitalism or free market economic system all means of production such as firms, factories, mines, transport are owned and controlled by private individuals and firms. Those who own the means of production are free to use them in any way they like with a view of making profits. Everybody is free to choose any business or job he likes.

There is free market economic system in the advanced countries like USA, UK, Japan. The industrialization and economic development of these countries has taken place under the condition of free market of capitalism.

Features of Market Economy

The main features of market economy are as follows:

• Private Property:

The right of private property is a major feature of market economy. The right of private property means economic or productive factors such as land, factories, mines, etc. are under private ownership and the ownership and the owners have right to own, control and dispose these means of production.

• Freedom of Enterprise and Choice:

There is freedom of enterprise and choice in market economy. Freedom of enterprise means that individuals are free to buy and hire economic resources, to organize these resources for production and to sell their product in market of their own choice.

Freedom of choice means that workers are free to enter into any occupation for which they are qualified and consumers are also free to buy any type of goods and services which they feel appropriate for their wants.

• Competition:

In the free market economy, competition exists between sellers or producers of similar consumer goods and services to attract customers, among the workers to get jobs and among the buyers to obtain goods to satisfy their wants. Competition promotes best use and efficient allocation of resources in the free market economy.

• Consumers' Sovereignty:

Under the market economy, consumers are supposed to supreme and is compared to be a king. The goods and services are produced according to the demand of the consumers.

• Self-interest:

The free market economy is based on the principle of self-interest. It means that individuals should be free to do as they wish. Each unit in the economy attempts to what is the best for itself. Firms act in such a way which leads to maximum profits or minimum losses. Workers move to those occupations which offer them highest wages. Consumers spend their income on those things which gives them maximum satisfaction.

• Market and Price

The free market economy functions through price mechanism. It means that economic problems are solved through the operation of prices in the market. Both buyers and sellers make decision on the basis of price of the product in the market.

• Limited Role of Government

Since the free market economy functions through and most of its problems are solved by markets and price, there is obliviously little role government can play, the role of government is to maintain law and order and create infrastructures which help to increase production and overall economics development.

• Profit Motive

In the free market economy, economic activities are under taken with the aim of earning profit. All the decisions regarding what to produce, how much to produce and for whom to produce are taken on the basis of profit and not on the basis of social welfare.