Q.Explain the law of demand and examine its exceptions.
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Start your 14-day free trial to unlock the full solution →The Law of Demand says that, ceteris paribus, quantity demanded of a good varies inversely with its price — more is bought at a lower price and less at a higher price, giving a downward-sloping demand curve. It rests on the law of diminishing marginal utility, the income effect, the substitution effect and the arrival of new buyers. Exceptions where it may not hold include Giffen (inferior) goods, Veblen/prestige goods, speculation about future prices, consumer ignorance, necessities and emergencies.
Statement of the Law
Other things remaining constant, there is an inverse relationship between the price of a commodity and its quantity demanded: a fall in price raises the quantity demanded and a rise in price reduces it. This gives a demand curve that slopes downward from left to right.
Assumptions
The law holds only when 'other things remain equal', i.e. no change in income, tastes and preferences, prices of related goods, population, or expectations about future prices.
Why the Demand Curve Slopes Downward (basis of the law)
- Law of Diminishing Marginal Utility — as more is consumed, marginal utility falls, so the consumer buys more only at a lower price.
- Income Effect — a fall in price raises the consumer's real income, enabling more purchases.
- Substitution Effect — when a good becomes cheaper relative to substitutes, consumers switch to it.
- New Buyers — at a lower price, more consumers can afford the good.
- Different Uses — a good with several uses is put to more uses when cheaper.
Exceptions to the Law of Demand
- Giffen Goods — for certain inferior goods (Giffen's paradox), a fall in price leads to a fall in quantity demanded, because the consumer shifts to superior goods.
- Goods of Ostentation (Veblen Goods) — prestige goods like diamonds and luxury items are bought more when their price is higher, as a status symbol.
- Expectation of Future Price Change — if prices are expected to rise further, people buy more even at a high price (and vice versa). …
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