Economics · Ch 3 — Demand
Law of Demand and Its Exceptions
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Law of Demand and Its Exceptions
The Law of Demand states: other things remaining the same, when the price of a commodity falls, the quantity demanded of it rises; and when the price rises, the quantity demanded falls. In short, price and quantity demanded are inversely related.
Why the law holds — the standard reasons taught at this level:
- Law of diminishing marginal utility — each successive unit of a good gives the consumer less additional satisfaction, so a buyer will only take more units if the price falls.
- Income effect — a fall in price raises the consumer's real purchasing power (the same money income now buys more), which usually raises quantity demanded.
- Substitution effect — a fall in the price of good X makes it relatively cheaper than substitute goods, so buyers substitute towards X.
- New buyers enter the market as price falls, since the good now becomes affordable to more people.
- Multiple uses of some goods mean a lower price extends the good's use into additional purposes (e.g. electricity used more freely once cheaper).
Exceptions to the Law of Demand — cases where the demand curve does not slope downward, an examiner favourite:
| Exception | Why it violates the law |
|---|---|
| Giffen goods (named after Sir Robert Giffen) | An inferior good forming a large share of a poor consumer's budget; a price fall makes the consumer effectively richer, so they buy LESS of the inferior good and switch to a superior substitute — quantity demanded falls as price falls |
| Veblen goods / articles of snob appeal | Diamonds, luxury cars, branded items — bought partly FOR their high price as a status symbol; a price cut can reduce their appeal and hence demand |
| Expectation of further price change | If buyers expect price to rise further, they may buy more even at a current higher price (and vice versa for an expected fall) |
| Necessities of life | Demand for basic necessities (salt, essential medicine) barely changes with price — near-zero response either way |