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 l l ow m e
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Twitte L i p t
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 Law of Demand
Statement of the law
• The law of demand states that there is an inverse relationship between price and quantity
demanded of a commodity when other things being constant
• According to this law, ‘other things being constant (ceteris paribus), quantity demanded of a
commodity is inversely related to the price of a commodity.
• Symbolically, Dx = f(Px)

Assumptions
• The price of related goods does not change
• There is no change in the income of consumers. Px Dx
• There is no expectation of change in the price in future
• Taste and preferences of consumers remain constant
• Other related factors remain unchanged.
Price (Px) Quantity Demanded (Q.D.)
(₹) (units)
10 2
8 4
6 6
4 8
2 10

Price
D

P2 C

P A
P1 B

D
Q.D.
Q2 Q Q1
Why does Law of Demand Operate/Basis of Law of Demand/Why
does Demand Curve slopes downwards to the right ?

1. The law of diminishing marginal utility

• The law states that with consumption of an additional unit of a commodity, marginal utility derived
from successive units goes on declining. A consumer will buy more and more units of a commodity
only when he has to pay less and less price for each additional unit.
• A consumer is in equilibrium when marginal utility is equal to price of the product (MU=P). Fall in the
price makes marginal utility greater than the price, this induces the consumer to buy more, so when
price falls demand rises and vice-versa.

Units of MUx Px Relation Demand

Commodity X
1 10 4
MU > P D
2 8 4
3 6 4
4 4 4 MU = P D
5 2 4 MU < P D
2. Income Effect
• A change in the quantity demanded as a result of change in the real income of a consumer caused by change
in the price of the commodity is called income effect.
• When price of a commodity falls, consumers’ real income or purchasing power increases. This induces him
to buy more of that commodity, thus demand increases and vice-versa.
P Real Income Demand
P Real Income Demand

3. Substitution Effect
• When the quantity demanded of a particular product changes due to change in the price of substitute
good it is called substitution effect.
• When the price of a commodity falls and the price of its substitute remains constant, it becomes relatively
cheaper in comparison to the other commodity.

4. Change in the number of buyers

• When the price of a commodity falls some new consumers start purchasing it, consequently the demand
for that commodity increases and vice-versa

5. Various Uses of a commodity

• A commodity like milk, steel and electricity etc. can be put to several uses. When the price of a commodity
increases consumers reduce the use of that commodity, so the demand reduces and vice-versa.
 Exceptions to the law of
In exceptions, thedemand
demand curve is positively sloped where quantity demanded is directly related with price.

Price D

P1 B
P A Px Dx
C
P2
D

Q1 Q.D.
Q2 Q
1. Giffen Goods ( named after Sir Robert Giffen)
• These are the inferior goods whose demand increases with the increase in its prices. There are several
inferior commodities, much cheaper than the superior substitutes often consumed by the poor
households as an essential commodity.
• These are the inferior goods on which the consumer spends a large part of his income and the demand
for which falls with a fall in their prices.
• In case of giffen goods, negative income effect is more powerful than substitution effect, so the law of
demand will not operate.

2. Necessities of Life
• There are certain commodities which have become essentials of the modern life. These are the goods
which consumer buys irrespective of an increase or decrease in their prices. For example, salt, food
grains etc.

3. Status Symbol Products

• There are some goods which are purchased to emphasize status by the rich section of the society. Such
goods will be purchased more at a higher price and less at a lower price. Example, diamonds, jewelry
etc. These are also called Veblen Goods or Conspicuous goods.

4. Future Expectations
• When the buyers expect a future rise in the price of a commodity then they increased quantities of that
commodity even at a higher price and vice-versa.
5. Ignorance and Illusion of buyers
• When a consumer is under a wrong impression that a higher priced product has better quality than low
priced goods, in such a situation, quantity demanded increases at a higher price.

6. Emergencies
• During emergencies ( medical, war, calamity etc. ) law of demand may not work because at such times,
consumers behave in an abnormal way, if they expect shortage of good when they would buy and hoard
more goods even at a higher price.

7. Other factors
• An individual may prefer a certain product because of its taste, habit, tradition, custom, culture etc. and
then the quantity demanded increases with the increase in price or remains same.
Change in Quantity Demanded and Change in
Demand
1. Change in Quantity Demanded ( Movement along the Demand Curve)
• When quantity demanded for a commodity changes due to change in its price,
keeping other things constant, it is termed as change in quantity demanded.
• It is caused due to price factor
• It is indicated by movement along the demand curve.
• Symbolically, Dx= f(Px)

Types
• Extension or Expansion of Demand
• Contraction of Demand
(i) Extension or Expansion of Demand
• When the quantity demanded of a commodity rises due to fall in its price (other factors remaining
constant), it is called extension or expansion of demand or rise in quantity demanded.
P D
• It is a downward movement on the same demand curve due to fall in the price

Price (₹) Q.D.(units)

Price
10 100 D
5 150

P A

P1 B

Q Q1 Q.D.
(ii) Contraction of Demand
• When the quantity demanded of a commodity falls due to rise in its price (other factors remaining
constant), it is called or contraction of demand or fall in quantity demanded.
P D
• It is an upward movement on the same demand curve due to rise in the price

Price (₹) Q.D.(units)

Price
10 100 D
15 50

P1 A

B
P

Q1 Q Q.D.
2. Change in Demand ( Shift in Demand Curve)
• Change in demand refers to increase or decrease in demand for a commodity in response to change in
other determinants of demand ( Non-price factors – price of related product, consumer’s income etc.)
other than the price of the same commodity.
• It is a shift formation of a new demand curve due to change in other factors when price of the product
remains constant.
• Symbolically, Dx= f(OF)

Types
• Increase in demand
• Decrease in demand
(i) Increase in Demand
• When demand for a commodity rises due to change in factors other than the price, it is called
increase in demand.
• Consumers are willing to purchase more of a commodity at its existing price.
• It is a shift formation of a new demand curve on the right hand side of the original demand curve.

Price
Price (₹) Q.D.(units)
10 100
D D1
10 150

Reasons for increase in demand

A B
• in the price of substitute product P

• in the price of complementary product

• in income of the consumer (Normal Goods) D D1

Q.D.
Q Q1
• in income of the consumer (Inferior Goods)

• Favourable change in Taste and Preferences

• Expectation about future rise in the price

(ii) Decrease in Demand
• When demand for a commodity falls due to change in factors other than the price, it is called
decrease in demand.
• Consumers are willing to purchase less of a commodity at its existing price.
• It is a shift formation of a new demand curve on the left hand side of the original demand curve.
Price (₹) Q.D.(units)
10 100
10 50

Price
Reasons for increase in demand
• in the price of substitute product D2 D

• in the price of complementary product

C A
P
• in income of the consumer (Normal Goods)

• in income of the consumer (Inferior Goods)

D2 D
• Unfavourable change in Taste and Preferences Q.D.
Q2 Q
• Expectation about future fall in the price
What is the difference between :
1. Expansion of quantity demanded and Increase in Demand
2. Contraction of quantity demanded and Decrease in Demand

Points of Comparison
• Meaning
• Cause
• Movement or Shift
• Example
• Diagram
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