Q.State the Law of Demand. Explain any three reasons why the law generally holds true.

The Law of Demand states an inverse price-quantity relationship, and it holds mainly due to diminishing marginal utility, the income effect and the substitution effect.

Statement of the Law of Demand: Other things remaining the same, when the price of a commodity falls, the quantity demanded of it rises; when the price rises, the quantity demanded falls. Price and quantity demanded thus move in opposite directions.

Three reasons the law holds:

1. Law of diminishing marginal utility: As a consumer buys successive units of a good, the additional (marginal) satisfaction from each extra unit falls. A rational consumer will only buy more units if the price charged also falls, matching the falling marginal utility — this is the deepest theoretical justification for the law.

2. Income effect: When the price of a good falls, the consumer's real income (purchasing power) effectively rises, even though money income is unchanged — the same rupee income now buys more of the good (and other goods). This higher real income typically leads the consumer to buy more of the now-cheaper good.

3. Substitution effect: When the price of good X falls while the prices of its substitutes stay the same, X becomes relatively cheaper. Rational consumers substitute AWAY from the now relatively costlier substitutes and TOWARDS X, raising the quantity of X demanded.

(Additional acceptable reasons: entry of new, lower-income buyers as price falls; and multiple uses of some goods extending as price falls.)

Stating the law without the "other things remaining the same" (ceteris paribus) qualifier is an incomplete statement and commonly marked down, since without it the law is not actually true in general.