Introduction
The Law of Demand states that, ceteris paribus, when the price of a good falls, the quantity demanded increases, and vice versa. This negative price-quantity relationship is captured by a demand schedule and portrayed in the demand curve.
Demand Schedule and Demand Curve
A demand schedule is a tabular representation showing quantity demanded at different prices:
| Price (₹) | Quantity Demanded (units) |
|---|---|
| 10 | 1,000 |
| 9 | 1,200 |
| 8 | 1,500 |
| 7 | 1,900 |
| 6 | 2,400 |
Plotting price on the vertical axis and quantity on the horizontal axis yields a downward-sloping demand curve.
Why the Demand Curve Slopes Downward
- Substitution Effect: When price falls, consumers substitute the now cheaper good for relatively expensive alternatives, increasing quantity demanded.
- Income Effect: A lower price effectively increases real income, enabling consumers to buy more goods.
Exception to the Law of Demand
Some goods do not follow the law of demand; their demand may rise as price rises. One such exception is the Giffen good. For low-income consumers, if the price of a basic food staple increases, they can’t afford more nutritious substitutes and end up consuming more of the staple.
Illustration Through Income vs Substitution Effects
With a price rise for a Giffen good, the substitution effect pushes consumers away, but the income effect dominates and is negative—consumers are so poorer they buy more of the inferior staple instead of more expensive substitutes. Thus, demand rises with price.
Conclusion
In general, the law of demand holds due to substitution and income effects reinforcing each other. But in exceptional cases like Giffen goods, the income effect can outweigh substitution, resulting in upward-sloping demand behavior.