Q.State and explain the ‘law of demand’ with its exceptions.

The law of demand says price and quantity demanded move in opposite directions (other things constant), giving a downward-sloping demand curve. Its main exceptions are Giffen goods, prestige goods, speculation, price expectations, ignorance and necessaries, where the law does not hold.

Statement of the Law of Demand: According to Alfred Marshall, 'other things remaining constant, the higher the price of a commodity, the smaller is the quantity demanded, and the lower the price, the larger is the quantity demanded.' In short, there is an inverse (indirect) relationship between the price of a good and its quantity demanded, when other factors are held constant.

Assumptions (other things constant): no change in the consumer's income, no change in tastes and preferences, no change in the prices of related (substitute and complementary) goods, no expectation of future price change, and no change in population.

Demand schedule and curve: As price falls, say from 5 to 4 to 3, quantity demanded rises, say from 10 to 20 to 30 units. When these are plotted with price on the Y-axis and quantity on the X-axis, the demand curve slopes downward from left to right, confirming the inverse relationship.

Reasons for the downward slope: the law of diminishing marginal utility, the income effect (a price fall raises real income), the substitution effect (the cheaper good replaces others), new consumers entering the market, and the many uses of a commodity.

Exceptions to the Law of Demand (cases where more is demanded even at a higher price, or less at a lower price):

1. Giffen goods (inferior goods). For certain cheap staple goods, a fall in price may lead to a fall in demand as consumers shift to superior goods (the Giffen paradox). …