Law of demand and its exceptions

1. Statement

The law of demand states that, other things being equal, the quantity demanded of a commodity varies inversely with its price: more is bought at a lower price and less at a higher price. Marshall: “The amount demanded increases with a fall in price and diminishes with a rise in price.” The law states a qualitative relationship (the direction of change), not how much demand will change; that is the subject of elasticity.

Assumptions (the “other things”):

• no change in the consumer’s income;
• no change in tastes, preferences and fashion;
• no change in the prices of related goods (substitutes and complements);
• no expectation of a future change in price;
• no change in population or in the distribution of income;
• the commodity is not a prestige good or a Giffen good.

2. Demand schedule and curve

An individual demand schedule shows the quantities one consumer buys at various prices; the market demand schedule adds up the quantities of all consumers at each price.

Demand curve (described). With quantity on the horizontal axis and price on the vertical, plotting each price–quantity pair and joining the points gives a curve DD sloping downward from left to right. The market demand curve is the horizontal sum of the individual curves and is flatter than either.

3. Why the demand curve slopes downward

1. Law of diminishing marginal utility. A consumer buys until MU equals price. As he buys more, MU falls, so he will buy more only if the price falls.
2. Income effect. A fall in price raises the consumer’s real income (purchasing power), so he can buy more of the good.
3. Substitution effect. When the price of tea falls, tea becomes cheaper relative to coffee, and consumers substitute tea for coffee.
4. New buyers. At a lower price, people who could not afford the good earlier enter the market.
5. Multiple uses. Goods like electricity or milk have several uses; at a lower price they are put to less important uses too.

4. Determinants of demand

Demand depends on: the price of the good; consumer’s income; tastes and preferences; prices of related goods (a rise in the price of a substitute raises demand; a rise in the price of a complement lowers it); expectations of future prices; size and composition of population; distribution of income; climate and season; advertising; and government policy such as taxes and subsidies.

Movement along versus shift of the curve. A change in quantity demanded due to the good’s own price is a movement along the same curve: extension (more bought at a lower price) or contraction (less at a higher price). A change due to any other determinant shifts the whole curve: increase (rightward, more bought at the same price, for example after a rise in income) or decrease (leftward).

5. Exceptions to the law of demand

In these cases, more is demanded at a higher price, or less at a lower price, and the demand curve slopes upward over at least part of its range.

• Giffen goods. Sir Robert Giffen observed that when the price of bread rose, poor British labourers bought more bread, because bread took so much of their income that the rise left them unable to afford meat, and they filled the gap with more bread. A Giffen good is an inferior good with a strong negative income effect that outweighs the substitution effect. Coarse grains for very poor households are the Indian example given in textbooks.
• Articles of conspicuous consumption (Veblen goods). Thorstein Veblen, in The Theory of the Leisure Class (1899), described goods bought to display wealth: diamonds, luxury cars, designer brands. A higher price makes them more desirable; a fall in price may reduce their appeal.
• Expectation of a further price change. If prices are rising and buyers expect them to rise more, they buy more now (hoarding during shortages, or shares in a rising stock market). If prices are falling and expected to fall further, they postpone purchases.
• Ignorance and the price–quality illusion. Consumers who judge quality by price buy more of a dearer product.
• Necessities. Salt, medicines and basic food are bought in roughly the same quantity whatever the price.
• Emergencies. In war, floods or a pandemic people buy more even at higher prices out of fear of shortage.
• Change in fashion or habit. If a good comes into fashion, more is bought even at a higher price; if it goes out, less is bought even when it is cheap.
• Speculative goods such as gold and land, which behave as in the expectation case.

6. Limitations of the law

The law of demand is limited by its assumptions. It holds only when income, tastes, prices of related goods and expectations stay constant, which is rare in practice; it does not apply to Giffen and prestige goods or under speculation; it states only the direction of change, not the amount; and it assumes rational behaviour, whereas consumers act on habit, impulse and advertising. Despite these limits, it remains a reliable statement of what happens in most markets most of the time.

7. Importance

The law guides business pricing (a seller knows that a price rise loses customers), taxation (taxing goods with inelastic demand yields more revenue), agricultural policy (a bumper harvest lowers prices) and monopoly pricing.

How this is examined

“Exceptions to the law of demand” was a 10-mark note in January 2026 (100-mark, Q.9) and an 8-mark note in June 2025 (100-mark, Q.8); “Limitations of demand” was a 6-mark note in January 2026 (80-mark); and “Law of demand” a 6-mark note in June 2025 (80-mark). For exceptions, give a one-paragraph statement of the law first, then the exceptions with an example each, and end with the shift-versus-exception point.