Law of Demand – Assumptions & Exceptions

The Law of Demand is a fundamental law in micro economics. It explains the inverse relationship between price and quantity demanded.

1. Statement of the Law

Other things being equal, the quantity demanded of a commodity increases when its price falls and decreases when its price rises.

So, price ↑ → demand ↓, and price ↓ → demand ↑ (ceteris paribus).

2. Demand Schedule & Curve (Example)

From the schedule, the demand curve slopes downwards from left to right.

Loading diagram…

3. Reasons for Downward Sloping Demand Curve

1. Law of Diminishing Marginal Utility

   • As more units consumed, extra satisfaction (MU) falls.
   • Consumers will buy more only if price falls.

2. Income Effect

   • When price falls, real income of consumer rises.
   • He can buy more with the same money.

3. Substitution Effect

   • When price of one good falls, it becomes cheaper relative to substitutes.
   • Consumers substitute cheaper good → demand ↑.

4. New Consumers

   • At lower prices, new buyers enter the market.

5. Multiple Uses

   • At low prices, a commodity may be used for more purposes (e.g., electricity).

4. Assumptions of the Law

The law holds only when other things remain constant:

1. Income of consumer remains constant
2. Prices of related goods remain constant
3. Tastes, habits and fashion remain unchanged
4. No change in population
5. No expectation of future price change
6. Quality of the commodity remains same

If these conditions change, the law may not hold.

5. Exceptions to the Law of Demand

In some special cases, demand increases even when price rises or falls when price falls.

1. Giffen Goods

• Very inferior goods consumed by poor people (e.g., coarse grain, bajra in some regions).
• When price of bajra rises, poor people may cut consumption of costly food and buy more bajra, so demand rises.

2. Articles of Prestige / Veblen Goods

• Goods which give status and prestige – e.g., luxury cars, diamonds, branded fashion.
• Higher price may make them more attractive to status-conscious buyers.

3. Expectation of Future Price Rise

• If consumers expect price to rise further, they may buy more now even at higher current price.

4. Fear of Shortage

• During war, pandemic or natural disaster, people may buy more even when price increases (e.g., medicines, masks).

5. Ignorance

• Consumers may think higher price = better quality and buy more.

6. Movement vs Shift in Demand Curve (Brief)

• Movement along demand curve:

  • Caused by change in price of the same good.
  • Price fall → extension of demand; price rise → contraction of demand.

• Shift of demand curve:

  • Caused by change in factors other than price (income, tastes, population, etc.).
  • Demand ↑ at all prices → rightward shift; demand ↓ → leftward shift.

Loading comparison…

7. Quick Revision Points

• Law of Demand: price ↑ → demand ↓; price ↓ → demand ↑ (other things constant).
• Demand curve slopes downwards due to MU, income, substitution effects, new consumers and multiple uses.
• Assumptions: constant income, tastes, prices of related goods, etc.
• Exceptions: Giffen goods, prestige goods, expectations, fear of shortage, ignorance.
• Movement vs shift is a favourite exam question.

8. Quiz Time 🎯

Loading quiz…