State and explain the law of demand and indicate the limitations of the law (Dec’13)

Q. State and explain the law of demand and indicate the limitations of the law (Dec’13).

Law of demand (Dec’13): Law of demand explains the cause and effect relationship between price and demand for a commodity. It says, given other things constant, as price rises, the demand for a commodity falls and vice versa. Here the cause is price and the effect is fall in quantity demanded.

Limitations of law (Dec’13): It is clear that law has some limits which are

1. Indivisibility of good: The theory is weakened by the fact that many commodities like a car, a house etc. are indivisible. In the case of indivisible goods, the law is not applicable.

2. The marginal utility of money is not constant: The theory is based on the assumption that the marginal utility of money is constant. But that is not really so.

3. The measurement of utility is not possible: Marshall states that the price a consumer is willing to pay for a commodity is equal to its marginal utility.

4. Utilities are independent: This law assumes that commodities are independent and therefore their marginal utilities are also independent. But in real life commodities are either substitutes or complements. Their utilities are therefore interdependent.

5. Indefinite budget period: According to Professor K. E. Boulding, indefinite budget period is another difficulty in the law. Normally the budget period is assumed to be a year. But there are certain commodities which are available in several succeeding accounting periods. It is difficult to calculate marginal utility for such commodities.

At last we may say law does not everything law has some limitations.