Law of demand

Also called: Inverse price-demand relation · Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 9, Ch 9 "The Price Puzzle: What Drives the Market"; Class 11, Ch 1 "Introduction (Statistics for Economics)"; Class 11, Ch 6 "Correlation"; Class 12, Ch 2 "Theory of Consumer Behaviour"

Meaning

The law of demand says that if other things stay the same (ceteris paribus), the quantity demanded of a good is inversely related to its own price. When the price rises, people buy less. When the price falls, people buy more.

It explains why the demand curve (a graph of how much people will buy at each price) slopes downward. It is also the base for later topics such as elasticity, market equilibrium and the effect of subsidies.

• Demand function: q = d(p)
• Linear form: d(p) = a − bp, where a > 0 and b > 0. The minus sign in front of b is the law of demand.

Explanation

How the law works

• Ceteris paribus (Latin for "other things equal") means these are held fixed:
• the consumer's income
• the prices of related goods (substitutes and complements)
• tastes

• expectations about future prices

• Only the good's own price changes.

• Worked example: d(p) = 100 − 2p
• At p = ₹20, q = 100 − 40 = 60 units.
• At p = ₹30, q = 100 − 60 = 40 units.

• The price rose by ₹10 and quantity fell by 20 units, so the curve slopes down. Here b = 2 is the slope: each ₹1 rise in price cuts demand by 2 units.

• Class 9 example: early in the season, mangoes cost ₹150 a kg and people buy only a few. Later in the season prices fall, and people buy more.

• Movement vs shift:
• A change in the own price moves the buyer along the same curve. This is called a change in quantity demanded.
• A change in income, tastes, expectations or prices of other goods shifts the whole curve. This is called a change in demand.
• The law of demand is only about the first case.

Why the demand curve slopes down

(a) Diminishing marginal utility (cardinal approach)

• Utility is the satisfaction a person gets from a good.
• Marginal utility (MU) is the extra satisfaction from one more unit.
• Law of diminishing marginal utility: each extra unit gives less satisfaction than the one before.
• Consumer's equilibrium (the point where the consumer is best off): MU in money terms = price. With many goods: MUx / Px = MUy / Py = MU of money.
• Worked example:
• The 1st mango is worth ₹50 to her, the 2nd ₹40 and the 3rd ₹30.
• At a price of ₹40 she buys 2 mangoes.
• She buys the 3rd only if the price falls to ₹30.
• So sellers can sell more only at a lower price, and the demand curve slopes down.

(b) Substitution effect

• Substitution effect: the change in quantity that comes only from a good becoming cheaper or dearer compared with other goods, with the consumer's satisfaction kept at the same level.

• Example: bananas become cheaper relative to mangoes, so she buys more bananas and fewer mangoes.

• Rule: when a good's price falls, the substitution effect always raises the quantity bought. This is true for normal, inferior and Giffen goods alike.

(c) Income effect

• Income effect: the change in quantity demanded caused by a change in real income (purchasing power, meaning what your money can actually buy) when a price changes [2].
• Worked example:
• She earns ₹1,200 a month and buys 20 kg of bananas at ₹40 a kg (₹800).
• The price falls to ₹30 a kg, so 20 kg now costs ₹600.
• ₹200 is freed. Her money income is the same, but her real income has risen by ₹200.
• For a normal good (demand rises with income), this extra real income pushes demand up further.

Total price effect = substitution effect + income effect

The figures below are for a price fall. They are only an illustration. What matters is the sign (+ or −) and the relative size of each effect.

Type of good	Substitution effect	Income effect	Total effect	Law of demand?
Normal	+ 4 kg	+ 2 kg	+ 6 kg	Holds strongly
Inferior (not Giffen)	+ 4 kg	− 1 kg	+ 3 kg	Holds weakly
Giffen	+ 2 kg	− 5 kg	− 3 kg	Violated

• Inferior good: demand falls as income rises. An example is coarse cereals, once a household is above a certain income.
• Giffen good: an inferior good whose negative income effect is bigger than its substitution effect, so its demand curve slopes upward.
• How it works when the price rises:
  • A very poor family spends most of its budget on a cheap staple such as bread.
  • The staple's price rises, so the family's real income falls sharply.
  • The family can no longer afford costlier food such as meat.
  • It buys even more of the staple to get enough calories.
• Usual conditions: the good is strongly inferior, takes up a large share of the budget and has few close substitutes, and the buyers are very poor.

Exceptions and apparent exceptions

• Giffen goods: a true exception, caused by the income effect. Examples:
• Giffen/Marshall's case of poor British labourers buying more bread.
• Irish potatoes in the famine of 1845–49, though historians dispute this case.

• Jensen and Miller (2008): rice in Hunan (China).

• Veblen goods: luxury goods bought because a high price signals status. Examples are luxury cars and designer labels. The idea comes from Thorstein Veblen's "conspicuous consumption" in The Theory of the Leisure Class (1899), which means buying more, or costlier, goods than you need in order to show off wealth [3].

• Bandwagon effect (Harvey Leibenstein, 1950): people buy because many others already do, for example queues on the day a new phone launches.
• Snob effect (Leibenstein): people buy less as a good becomes common.
• Price expectations or panic buying: people buy more while prices rise because they expect prices to rise further. This is not a true exception. The demand curve has shifted.
• Others: necessities bought in fixed amounts (salt, life-saving medicines), and buyers who think "higher price = better quality".

In India

• Everyday examples:
• Seasonal fall in mango prices → people buy more mangoes (NCERT Class 9).

• Onion hoarding and the rush for sanitiser during COVID-19 were driven by expectations. They shift demand and do not break the law.

• Measurement: NSO's Household Consumption Expenditure Survey (HCES) tracks how households spend.

• In 2023-24, average MPCE (monthly per capita consumption expenditure, meaning average household spending per person per month) was ₹4,122 in rural areas and ₹6,996 in urban areas. This excludes free items from welfare schemes [4].
• Food's share of spending in 2023-24 was 47.04% (rural) and 39.68% (urban) [4].
• Between 2011-12 and 2022-23, the food share fell from about 53% to 46% (rural) and from about 43% to 39% (urban) [5].

• As incomes rose, households moved from starchy cereals to higher-value foods [5][6]. Some coarse cereals behave like inferior goods, which is exactly the kind of good where the income effect works against the law of demand.

• Policy link: price subsidies on staples through the PDS (Public Distribution System, which gives ration-shop grain at low prices) change the price poor households pay. So how they respond depends on the income and substitution effects.

Don't confuse with

• Change in demand (shift of the curve): caused by income, tastes, expectations or prices of related goods. The law of demand covers only the change in quantity demanded caused by the good's own price, which is a movement along the curve.
• Giffen good vs inferior good: every Giffen good is inferior, but not every inferior good is Giffen. It becomes Giffen only when the negative income effect is larger than the substitution effect.
• Giffen good vs Veblen good: both have upward-sloping demand. Giffen is caused by the income effect and involves poor buyers and staple goods, so it fits standard theory. Veblen is caused by prestige and involves rich buyers and luxury goods; here tastes depend on the price itself.
• Law of diminishing marginal utility: this is a reason for the law of demand under the cardinal approach. It is not the law itself. It is about satisfaction, while the law of demand is about price and quantity.

Prelims Hooks

• Law of demand: price and quantity demanded are inversely related, ceteris paribus. In d(p) = a − bp, b > 0 gives the downward slope.
• When price falls, the substitution effect always raises the quantity of that good, whatever type of good it is.
• Trap: "All inferior goods are Giffen goods" is false. "All Giffen goods are inferior goods" is true.
• Panic buying caused by an expected price rise is a shift of the demand curve, not an exception to the law of demand.
• The Theory of the Leisure Class (1899) by Thorstein Veblen introduced "conspicuous consumption" [3]. Bandwagon and snob effects come from Leibenstein (1950).
• The Irish potato famine (1845–49) Giffen case is disputed. Jensen–Miller (2008) found Giffen behaviour for rice in Hunan.

Mains Points

• Food subsidies and the Giffen risk:
• Jensen–Miller (2008) found that very poor households in Hunan bought less rice when a subsidy made rice cheaper.
• The extra real income went to other, preferred foods.

• So PDS-type price subsidies may add more to dietary variety than to grain intake. Nutrition policy should look at the whole diet, not only how much cereal is eaten.

• Falling food share and crop policy:

• The food share fell from about 53% to 46% (rural) and about 43% to 39% (urban) between 2011-12 and 2022-23 [5].
• Cereal demand grows slowly as income rises, so it matters to shift production towards pulses, dairy and horticulture.

• This is also a warning against over-procuring rice and wheat.

• Millets and the inferior-good tag:

• Coarse cereals lose demand as incomes rise.
• Promoting them as nutritious, higher-value foods (for example, the International Year of Millets push) aims to change tastes. That would shift the demand curve outward so millets stop behaving like inferior goods.

Related concepts

• Substitution effect
• Income effect
• Normal good
• Inferior good
• Giffen good
• Veblen good
• Conspicuous consumption
• Bandwagon effect
• Snob effect
• Demonstration effect

Read more

• Law of demand, substitution and income effects, normal/inferior/Giffen goods and exceptions