Law of demand: exceptions, changes in demand and determinants

1. Demand and the law of demand

Demand is the quantity of a commodity a consumer is willing and able to buy at a given price during a given period. A desire without the means to pay, or the means without the willingness, is not demand.

Marshall’s statement: “The amount demanded increases with a fall in price and diminishes with a rise in price.” In short, other things being equal, price and quantity demanded vary inversely. The demand function is D_x = f(P_x), the other determinants held constant.

Assumptions (the “other things”): no change in the consumer’s income, tastes and preferences, prices of related goods, size and composition of population, expectations of future prices, and no new substitute.

Plotted with quantity on the horizontal axis and price on the vertical, the points give a demand curve sloping downward from left to right. Adding individual schedules horizontally gives the market demand schedule.

2. Why the demand curve slopes downward

1. Law of diminishing marginal utility. Each extra unit gives less utility, so a consumer buys more only if the price falls (see the note on cardinal utility in this unit).
2. Income effect. A fall in price raises real income; the consumer can buy more of the good with the same money.
3. Substitution effect. When tea becomes cheaper relative to coffee, consumers substitute tea for coffee.
4. New consumers. A lower price brings in buyers who could not afford the good before.
5. Several uses. Goods like electricity or milk have many uses; at a lower price they are put to less important uses too.

3. Exceptions to the law

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

• Giffen goods. Robert Giffen observed that when the price of bread rose, poor labourers in nineteenth-century Britain bought more bread, because they could no longer afford meat. A Giffen good is an inferior good on which the poor spend a large part of their income; its negative income effect outweighs the substitution effect.
• Veblen (prestige) goods. Thorstein Veblen’s conspicuous consumption: diamonds, luxury cars and designer goods are wanted because they are expensive. A fall in price lowers their snob value.
• Expectation of a further price change. If prices are rising and are expected to rise further, people buy more now (as with shares, gold or property).
• Ignorance and price as a sign of quality. A consumer may judge a costlier product to be better.
• Necessities and emergencies. In war, famine or a pandemic people buy as much as they can of essentials whatever the price.
• Change in fashion or habit. A good going out of fashion is not bought even at a lower price.

4. Change in quantity demanded and change in demand

Extension and contraction (movement along the same curve) are caused only by a change in the price of the good itself. A fall in price from Rs. 40 to Rs. 30 raises quantity demanded from 2 to 3 packets: this is extension. A rise from Rs. 30 to Rs. 40 is contraction.

Increase and decrease (shift of the whole curve) are caused by a change in any other determinant. An increase in income makes the consumer buy more at every price, and the curve shifts to the right:

An increase can also mean the same quantity bought at a higher price; a decrease, the same quantity at a lower price. Use the words carefully: economists say “extension” and “contraction” for price-induced changes, and “increase” and “decrease” for shifts.

5. Determinants of demand

The full demand function is D_x = f(P_x, P_r, Y, T, N, E, …).

1. Price of the commodity (P_x): the inverse relation above.
2. Prices of related goods (P_r): a rise in the price of a substitute (coffee) increases demand for tea; a rise in the price of a complement (sugar, petrol for cars) decreases it.
3. Income (Y): for normal goods demand rises with income; for inferior goods (coarse grain) it falls as consumers move to better goods.
4. Tastes, preferences and fashion (T), influenced heavily by advertising.
5. Size and composition of population (N): more people, more demand; a younger population demands different goods from an ageing one.
6. Distribution of income: a more equal distribution raises demand for necessities and mass consumption goods.
7. Expectations (E) of future prices and incomes.
8. Climate and season: woollens in winter, umbrellas in the monsoon.
9. Government policy: taxes, subsidies, credit availability. A GST rate cut on a good lowers its price and extends demand; easier consumer credit increases demand for durables.

6. Importance and limitations

The law guides pricing by firms, the choice of goods for taxation, and agricultural policy. It is limited because it states only the direction of change, not its size (that is elasticity, the next note), and because its assumptions rarely hold together. Principles of Economics covers the same law in its note on law of demand and its exceptions.

How this is examined

January 2026 (80-mark) set “Explain the law of demand. Discuss the reasons for the downward slope of demand curve” (10 marks) with a 6-mark option on “exceptions to law of demand”; the 100-mark paper of the same sitting set “Law of demand” as an 8-mark short note and “Determinants of demand” as a 10-mark part of Q.9; February 2025 asked “Explain the law of demand. What are its exceptions?” for 16 marks. For the long answer: definition, statement, assumptions, schedule and curve described, reasons for the slope, exceptions with the trap point, and a closing paragraph on extension versus increase.