Law of Demand
Class 11 Micro Economics — The fundamental inverse relationship between price and quantity demanded
Statement and Assumptions
Law of Demand
There is an inverse relationship between price and quantity demanded, keeping other factors constant (ceteris paribus). This is also known as the First Law of Purchase.
Ceteris Paribus Assumptions
Law HoldsImportant Facts about Law of Demand
- Inverse Relationship: Indicates direction only, not magnitude.
- Qualitative, not Quantitative: Shows direction of change, not exact magnitude.
- No Proportional Relationship: A 10% price rise doesn't mean exactly 10% demand fall.
- One-Sided: Only explains effect of price on demand, not vice versa.
Demand Schedule and Curve for Law of Demand
The demand schedule and curve visually confirm the inverse relationship between price and quantity demanded.
Demand Schedule
| Price (₹) | Quantity (units) |
|---|---|
| 5 | 1 |
| 4 | 2 |
| 3 | 3 |
| 2 | 4 |
| 1 | 5 |
Demand Curve DD
As price falls from ₹5 to ₹1, quantity demanded rises from 1 unit to 5 units — confirming the inverse relationship.
Derivation of Law of Demand
The Law of Demand can be derived from two utility-based approaches. Walk through each step by step.
Consumer buys where MU = Price (equilibrium condition).
Key Insight
Equilibrium: MU = P
⭐ Conclusion: Inverse relationship between price and demand.
Reasons for Law of Demand
Price Effect = Income Effect + Substitution Effect
The total effect of a price change on demand = Income Effect + Substitution Effect. Both effects work together to create the inverse price-demand relationship.
Exceptions to Law of Demand
Important
In normal conditions, the Law of Demand is universally applicable. These exceptions are special cases where consumer behavior deviates due to unique circumstances.
Giffen Goods
Special inferior goods on which consumers spend a large part of income. Demand rises with price. e.g., coarse cereals (jowar, bajra). Giffen's Paradox — Sir Robert Giffen observed British wage earners bought more bread when bread prices rose.
Status Symbol Goods
Diamonds, gold, antique paintings — demanded BECAUSE their prices are high. A price fall reduces status value, so demand falls.
Fear of Shortage
Consumers buy more even at rising prices when they expect scarcity. Common during wars, famines, and emergencies.
Ignorance
Consumers unaware of prevailing market prices may buy more at higher prices, thinking it's the fair price.
Fashion Related Goods
Fashion goods see demand rise with price — consumers associate higher price with exclusivity and prestige.
Necessities of Life
Rice, wheat, salt, medicines — bought regardless of price changes. Demand remains stable even at higher prices.
Change in Weather
Seasonal demand changes irrespective of price. Umbrellas in rainy season, woolens in winter — demand rises even if prices are high.
Key Takeaways
- Law of Demand: Inverse relationship between price and quantity demanded, ceteris paribus.
- Five assumptions must hold: no change in substitute/complement prices, income, expectations, or tastes.
- Derivation 1 (Single Commodity): Consumer buys where MU = P. Price falls → MU > P → buy more.
- Derivation 2 (Equi-Marginal): MUₓ/Pₓ = MU_y/P_y. Pₓ falls → buy more X, less Y.
- Five reasons: DMU, Substitution Effect, Income Effect, Additional Customers, Different Uses.
- Price Effect = Income Effect + Substitution Effect.
- Seven exceptions: Giffen goods, status symbols, fear of shortage, ignorance, fashion, necessities, weather.