The law of demand: statement, assumptions, why the curve slopes down, and exceptions

1. Statement of the law

The law of demand states the inverse relationship between price and quantity demanded. Marshall: “The amount demanded increases with a fall in price and diminishes with a rise in price.” More fully: other things remaining the same, when the price of a commodity falls, its quantity demanded rises, and when the price rises, its quantity demanded falls.

The law is qualitative: it gives the direction of change, not its size. The size is measured by elasticity.

2. Demand schedule and curve

The diagram, in words. Quantity is on the X-axis and price on the Y-axis. Plot the five points and join them: the line DD runs from the top left to the bottom right. It has a negative slope. A fall in price from Rs. 40 to Rs. 30 is a movement down the curve from 20 to 30 kg (extension); a rise is a movement up (contraction).

3. Assumptions

“Other things remaining the same” means that the following do not change:

• income of the consumer;
• tastes, preferences and habits;
• prices of related goods (substitutes and complements);
• no expectation of a further change in price;
• no new substitute is discovered;
• the commodity is not a status symbol or a Giffen good;
• size and composition of population are constant.

4. Why the demand curve slopes downward from left to right

1. Law of diminishing marginal utility. As a consumer buys more units, the utility of each additional unit falls. A rational consumer buys until marginal utility equals price (MU = P). He will buy more only if the price falls to match the lower marginal utility. This is Marshall’s explanation.
2. Income effect. When price falls, the consumer’s real income (purchasing power) rises. With the same money income he can buy more of the good.
3. Substitution effect. When the price of a good falls, it becomes cheaper relative to its substitutes. Consumers substitute it for the others. Hicks showed that the price effect is the sum of the income and substitution effects.
4. New consumers. At a lower price people who could not afford the good begin to buy it, so the number of buyers rises.
5. Multiple uses. Goods with several uses (electricity, milk) are put to less important uses only when the price falls. At a high price electricity is used only for lighting; at a low price, for heating and appliances as well.

5. Exceptions to the law of demand

In these cases the demand curve slopes upward: more is bought at a higher price, or less at a lower one.

1. Giffen goods. Sir Robert Giffen observed that when the price of bread rose, poor British labourers bought more bread. Bread was so large a part of their spending that the price rise cut their real income sharply, and they gave up meat and bought more bread to fill the gap. A Giffen good is an inferior good on which a large share of income is spent, where the negative income effect outweighs the substitution effect.
2. Veblen goods (articles of distinction). Thorstein Veblen, in The Theory of the Leisure Class (1899), described conspicuous consumption: diamonds, luxury watches and designer goods are bought because they are expensive. A fall in price lowers their prestige value and their demand.
3. Expectation of price changes. If buyers expect prices to rise further, they buy more now even at the higher price (shares in a rising market, gold, essential goods during a crisis). If they expect a further fall, they postpone purchase even though price has fallen.
4. Ignorance and the price–quality link. Where buyers cannot judge quality, they treat a higher price as a sign of better quality and buy more of the dearer brand.
5. Necessities. Essential goods such as salt, rice and medicines are bought in about the same quantity whatever the price. This is perfectly inelastic demand rather than an upward slope, but it is usually listed as an exception.
6. Emergencies and abnormal times. During war, famine or a pandemic, people hoard and buy more at rising prices.
7. Change in fashion or habit. A good going out of fashion is bought less even at a lower price; a fashionable one is bought more at a higher price.
8. Speculative demand. In stock and commodity markets, a price rise is read as a signal of further rises and attracts buyers.

6. Importance of the law of demand for a firm

• It is the basis of pricing: a firm knows that a higher price means lower sales.
• It is the basis of demand forecasting and sales planning.
• It guides government on the effect of taxes and subsidies on consumption.
• It explains why price cuts and discounts can clear stock.

How this is examined

January 2026: “Explain law of demand with exceptions to the law” (10 marks). February 2025: “What is law of demand? Why does the demand curve slope downwards from left to right? Examine” (10 marks) and “Exceptions to the law of demand” (6 marks). August 2024: “Exceptions of law of demand” (6 marks). For the essay, give Marshall’s statement, a schedule, the curve described in words, the assumptions, then either the reasons or the exceptions depending on the question. The schedule and diagram take two minutes and are always rewarded.