Law of Demand defines the inverse relationship between price of a good and quantity demanded, assuming all other factors remain constant.
## Core Concept
The Law of Demand states: As price increases, quantity demanded decreases, and vice versa — all else being equal (ceteris paribus). This inverse relationship is fundamental to microeconomic theory and consumer behaviour.
Key assumptions: - Consumer income remains constant - Tastes and preferences don't change - Prices of related goods (substitutes and complements) stay the same - No expectation of future price changes - Number of consumers in market remains fixed
The relationship is shown graphically as a downward-sloping demand curve (price on Y-axis, quantity on X-axis).
## Reasons Behind the Law of Demand
- Substitution Effect: When price of good X rises, consumers switch to relatively cheaper substitutes
- Income Effect: Price increase reduces purchasing power; consumers buy less of normal goods
- Diminishing Marginal Utility: As consumption increases, satisfaction from each additional unit falls; consumers willing to pay less
- Range of Consumers: Higher prices exclude lower-income buyers; lower prices attract them
## Formula & Mathematical Expression
Demand Function: Qd = f(P, I, Pr, T, E)
Where: - Qd = Quantity demanded - P = Price of the good - I = Income - Pr = Price of related goods - T = Tastes and preferences - E = Consumer expectations
Linear Demand Equation: Qd = a – bP
(where *a* = intercept, *b* = slope coefficient showing price sensitivity)
## Movement vs Shift (Important Distinction for Exams)
| Movement Along Curve | Shift of Curve | |---|---| | Caused only by price change | Caused by change in any factor OTHER than price | | Moves up/down same curve | Entire curve shifts left (decrease) or right (increase) | | Example: Price ↑ → Qd ↓ | Example: Consumer income ↑ → entire demand curve shifts right |
## Worked Example
A clothing retailer observes: at ₹500 per shirt, 200 units sell per week; at ₹400, 300 units sell per week.
Calculate demand elasticity and confirm Law of Demand: - Price decrease: ₹500 → ₹400 - Quantity increase: 200 → 300 units - Law of Demand holds ✓ (inverse relationship confirmed)
## Common Exam Applications
- Price policy decisions: Firms use demand law to forecast sales impact of price changes
- Consumer surplus calculation: Based on difference between willingness-to-pay and actual price
- Demand elasticity measurement: Quantifies responsiveness of quantity to price changes (covered separately)
- Market equilibrium analysis: Demand curve intersects supply curve to determine equilibrium price and quantity
- Taxation impact: Indirect tax increases effective price; Law of Demand predicts quantity fall
## Exceptions & Limitations (Minor but Testable)
- Giffen Goods: Inferior goods where income effect outweighs substitution effect (rare; mostly theoretical)
- Veblen Goods (Prestige/Status Goods): Higher price perceived as higher quality/status; quantity demanded may increase
- Speculative Markets: During hyperinflation, rising prices cause buying panic (hoarding), violating normal demand law
- Psychological Factors: Scarcity perception or brand loyalty may override price signals
## Common Exam Mistakes
- Confusing "demand" (willingness + ability to buy) with "desire" alone
- Treating movement along curve same as curve shift
- Forgetting "ceteris paribus" condition — always state assumptions
- Mixing Law of Demand with elasticity concepts (elasticity measures *how much*, demand law states *direction*)
- Assuming Law of Demand applies universally without acknowledging exceptions