Q.State and explain the assumptions underlying the Law of Demand.
The Law of Demand rests on several assumptions, all captured by the phrase 'other things remaining constant.' There must be no change in the consumer's income, since an income change occurring alongside a price change would itself alter quantity demanded, confusing the picture. There must be no change in the prices of related goods (substitutes and complements), and no change in tastes, preferences or fashion. The size and composition of population, and the distribution of income in society, are assumed fixed. The consumer's expectations regarding future prices must remain unchanged — the law assumes the buyer is not purchasing more or less purely in anticipation of a further price movement. Government policy (taxes or subsidies affecting the commodity) is assumed unchanged. Finally, the commodity must have no prestige or snob value — its price must not itself be read as a status signal, and no new substitute must enter the market during the period considered. When any one of these assumptions is violated in the real world, the simple inverse relationship of the Law of Demand may not hold, producing what looks like an exception to the law.
The Law of Demand assumes unchanged income, tastes, related-good prices, population, income distribution, price expectations and government policy, and that the commodity has no prestige value — violating any of these can produce an exception to the law.
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