Law of Demand: Statement, Schedule, Curve, Reasons & Exceptions

1. Statement of the Law of Demand

The Law of Demand was systematically formulated by Dr. Alfred Marshall in his book “Principles of Economics” (1890).

• Simple Statement:

  “Other things remaining constant (Ceteris Paribus), the quantity demanded of a commodity increases when its price falls, and decreases when its price rises.”

• Alfred Marshall’s Definition:

  “The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or in other words, the amount demanded increases with a fall in price, and diminishes with a rise in price.” — Dr. Alfred Marshall

Key Takeaway: Inverse Relationship

There is an Inverse (Negative / Opposite) Relationship between Price (P) and Quantity Demanded (Qd):

• Price Up (⬆) → Quantity Demanded Down (⬇)
• Price Down (⬇) → Quantity Demanded Up (⬆)

2. Assumptions of the Law of Demand (Ceteris Paribus)

The Latin phrase Ceteris Paribus means “Other things remaining equal or constant.” The Law of Demand works ONLY IF all non-price factors remain unchanged:

1. No change in the Consumer’s Income: If price doubles and your salary triples at the same time, you might still buy more! So income must remain constant.
2. No change in Tastes, Preferences, Habits, and Fashion.
3. No change in the Prices of Related Goods (Substitutes and Complements).
4. No expectation of Future Price Changes: Consumers should not expect the price to crash or skyrocket tomorrow.
5. No change in the Size of Population or Weather/Season.
6. The commodity is a Normal Good (not a prestige/Veblen good or Giffen good).

3. Demand Schedule and Demand Curve

A. Demand Schedule (Tabular Representation)

A Demand Schedule is a table showing different quantities of a commodity demanded at different prices during a given time period:

B. Demand Curve (Graphical Representation)

When we plot the numbers from the Demand Schedule on a graph — placing Quantity Demanded on the X-axis (horizontal) and Price on the Y-axis (vertical) — we get the Demand Curve (DD).

   Price (₹/kg)
    ^
100 |  * A (1 kg, ₹100)
 80 |      * B (2 kg, ₹80)
 60 |          * C (3 kg, ₹60)
 40 |              * D (4 kg, ₹40)
 20 |                  * E (5 kg, ₹20)  <-- Demand Curve (DD)
  0 +------------------------------------> Quantity Demanded (kg)
       1   2   3   4   5

• Shape of the Demand Curve: The Demand Curve slopes downward from Left to Right (it has a negative slope), showing that as Price falls along the Y-axis, Quantity Demanded increases along the X-axis!

4. Why Does the Demand Curve Slope Downward from Left to Right? (5 Core Reasons)

This is a favourite 5-mark or 10-mark question in DAVV exams: “Why does the demand curve slope downward?” or “Why do people buy more at a lower price?”

1. Law of Diminishing Marginal Utility (DMU):
   • As a consumer consumes more and more units of a good (say, 1st roti, 2nd roti, 3rd roti), the extra satisfaction (Marginal Utility) derived from each additional unit keeps falling. Therefore, a rational consumer is willing to buy an extra unit only when its price is reduced!
2. Income Effect (Increase in Real Purchasing Power):
   • Suppose you buy 1 kg of apples every week for ₹100. If the price of apples drops to ₹50/kg, you can buy the same 1 kg for ₹50 and still have ₹50 saved in your pocket! Your Real Income (purchasing power) has increased, allowing you to buy 2 kg of apples instead of 1 kg.
3. Substitution Effect:
   • Suppose Tea and Coffee both cost ₹20 per cup. If the price of Tea drops to ₹10 while Coffee stays at ₹20, Tea becomes relatively cheaper. Many coffee drinkers will substitute (switch from) Coffee to Tea, increasing the demand for Tea!
   • (Note: Price Effect = Income Effect + Substitution Effect).
4. Entry of New Buyers (Market Expansion):
   • When the price of smartphones or ACs is very high (₹60,000), only rich families can buy them. When the price falls to ₹10,000–₹25,000, millions of middle-class families enter the market as new buyers, pushing total market demand up!
5. Multiple / Alternative Uses of a Commodity:
   • Goods like milk, electricity, coal, and steel have many uses. When milk is very expensive (₹80/litre), a family uses it only for baby food and tea. When milk becomes cheap (₹40/litre), the family buys much more milk to make curd, paneer, ghee, kheer, and buttermilk!

5. Exceptions to the Law of Demand (When Demand Curve Slopes Upward ↗)

Sometimes, strange things happen in the market: When Price RISES (⬆), people buy MORE (⬆); and when Price FALLS (⬇), people buy LESS (⬇)! In these rare cases, the Demand Curve slopes upward from left to right (Positive Slope).

Here are the 6 Classic Exceptions to the Law of Demand:

1. Giffen Goods (The Giffen Paradox) — Sir Robert Giffen

• Who discovered it: British economist Sir Robert Giffen observed 19th-century poor Irish labourers whose diet consisted mainly of cheap potatoes/bread and a tiny bit of expensive meat.
• What happened: When the price of bread/potatoes (inferior staple food) increased sharply, the poor workers could no longer afford meat at all! To fill their stomachs and survive, they had to cut out meat completely and buy EVEN MORE potatoes/bread despite the higher price!
• Rule: Giffen Goods are special ultra-inferior staple goods on which poor families spend a large portion of their income, where the negative income effect is stronger than the substitution effect.

2. Veblen Goods / Articles of Snob Appeal (Conspicuous Consumption) — Thorstein Veblen

• American economist Thorstein Veblen pointed out that ultra-rich people buy certain luxury goods — like diamond necklaces, Rolex watches, Rolls-Royce cars, and Louis Vuitton bags — not for their basic utility, but to show off their wealth and status (Prestige Value)!
• The higher the price of a diamond, the greater its prestige value, so rich people buy more of it. If diamonds suddenly became as cheap as glass beads (₹100), rich people would stop buying them altogether!

3. Expectation of Further Price Rise in the Future (Speculative Markets)

• In the Stock Market (Share Market), real estate, or gold market, if the price of a share rises from ₹500 to ₹600 today, investors often buy more shares at ₹600 because they expect it to touch ₹900 next week!

4. Emergencies, War, Famine, or Pandemic Panic

• During a war, curfew, or COVID-19 lockdown announcement, people panic about future shortages and hoard flour, rice, cooking oil, and medicines in huge quantities even when shopkeepers charge double the price!

5. Consumer Ignorance (The “Price–Quality Illusion”)

• Sometimes consumers mistakenly believe that “Higher Price = Superior Quality” and “Lower Price = Duplicate / Inferior Quality” (especially in cosmetics, medicines, and wine), so they buy more of the higher-priced pack.

6. Necessities of Life & Habit-Forming Goods

• For life-saving medicines (like Insulin for a diabetic patient), salt, or addictive goods (cigarettes/alcohol for an addict), the consumer continues to buy the same quantity even when the price rises sharply.

💡 DAVV Exam Tip

Question (10 Marks): “State and explain the Law of Demand with the help of a schedule and diagram. Why does the demand curve slope downward? Mention its exceptions.”

• Write Marshall’s Statement, list the Assumptions (Ceteris Paribus), draw the 5-row Demand Schedule and the Downward-Sloping Demand Curve (DD).
• Clearly explain the 5 Reasons for Downward Slope (DMU, Income Effect, Substitution Effect, New Buyers, Multiple Uses) and the 6 Exceptions (highlighting Giffen Goods and Veblen Goods)!