The Law of Demand

The Law of Demand states that, other things remaining constant (ceteris paribus), the quantity demanded of a commodity is inversely related to its price — as price rises, quantity demanded falls, and as price falls, quantity demanded rises.

Assumptions. The law holds only when income, tastes and preferences, prices of related goods, and consumer expectations remain unchanged, and the commodity itself is not one bought for status (see the exceptions below).

Why does demand fall as price rises? Three broad reasons are usually given:

1. Law of Diminishing Marginal Utility — a consumer buys successive units of a commodity up to the point where the marginal utility from the last unit equals its price; if price rises, the consumer must cut back purchases to keep marginal utility matched to the new, higher price.
2. Income effect — a fall in price raises the real purchasing power of a given money income (the same rupee now buys more), which generally lets the consumer buy a larger quantity. …