What does Law of Demand State? And What are the Exceptions to the Law of Demand?

Updated on May 31, 2014

Meaning of the Law of Demand

Law of demand states “while other things do not change, there is an inverse relationship between the price of a commodity and the quantity demanded at a specified time.” In simple terms, people tend to purchase more of goods or services when their prices decrease and tend to purchase less when the prices increase. However, the law of demand is valid only when the assumption “other things remaining the same” is fulfilled.

Assumptions of the Law of Demand

By the phrase “other things remaining the same”, law of demand assumes the following:

  • Consumer’s income, tastes and preferences are constant.
  • Prices of substitutes and complements do not change.
  • There are no new substitutes for the goods under consideration.
  • People do not speculate on prices. It means that if price of the commodity in question falls, people will not wait for further decline in prices.
  • The commodity under consideration does not have prestige value.

The law of demand will not work as expected if any one of the aforementioned assumptions is violated.

Basis for the Law of Demand

The foundation for law of demand is law of diminishing marginal utility. Marshall derived law of demand from law of diminishing marginal utility. Law of diminishing marginal utility states that utility derived from additional units of a commodity keeps declining. For example, when you eat the first apple, you get more satisfaction from it. Here satisfaction means utility. At the same time, when you start eating more apples, the utility you derive from every additional unit becomes less and less. This occurs because you reach the saturation level.

From this diminishing marginal utility concept, you can derive law of demand. Let us consider the same apple example. Since the first apple gives more utility, you do not bother about the price of it. Hence, you tend to buy an apple even at a high price. However, additional units of apple give you less and less utility. Hence, you do not want to buy apples at a high price anymore. Now the seller has to lower the price of apples to increase the demand. When the price is declined, you start buying more apples again. In this manner, law of diminishing marginal utility paves a path to law of demand.

There is a direct relationship between marginal utility and price of a commodity. Further, there is an inverse relationship between quantity demanded and price of a commodity. Let us look at figure 1. From figure 1(a), we understand that OM1 quantity of goods gives MU1 marginal utility. Now MU1 = P1. From figure 1(b), we understand that at OP1 price, the consumer demands OM1 quantity. Similarly, OM2 quantity of goods gives MU2 marginal utility. Now MU2 = P2. At price OP2, the consumer purchases OM2. Further, at OM3 quantity, the marginal utility is MU3. MU3 = P3. At price P3, the consumer purchases OM3 quantity. Because of diminishing utility, the marginal utility curve slopes downwards from left to right (in figure 1(a)). Therefore, the demand curve based on marginal utility also slopes downwards from left to right (in figure 1(b)).

Exceptions to the Law of Demand

In general, people tend to buy more when the price declines. Also demand decreases when the price starts moving upwards. This causes the demand curve slope downwards from left to right. However, there are some exceptions to this rule. Because of these exceptional cases, demand curve takes unusual shape, which does not obey the law of demand. In the exceptional cases, demand curve slopes upwards from left to right. This means that demand decreases when there is a fall in price and demand increases when there is a rise in price. This type of demand curve is known as an exceptional demand curve or positively sloped demand curve.

For example, have a look at figure 2. In figure 2, DD represents a demand curve, which slopes upwards from left to right. The diagram shows that that when the price rises from OP1 to OP2, the quantity demanded also increases from OQ1 to OQ2 and vice versa. Conspicuously, such positively sloped demand curves violate the basic law of demand.

Causes

1. Giffen Paradox

Sir Robert Giffen observed consumption pattern of low-paid British wage earners early in 19th century. He found that an increase in the price of bread caused wage earners to buy more of it. The wage earners supported themselves by consuming bread only. When the price of bread increased, they spent more money on a given quantity of bread by restricting other expenses. Marshall was unable to explain this scenario and called it ‘Giffen Paradox’.

2. Veblen Goods

Another exception is based on the doctrine of conspicuous consumption attributed by Thorstein Veblen. People purchase certain goods for ostentation or showy purposes. Such goods are known as Veblen goods. Since these goods are used to impress others, people may not buy when the price falls. In other words, demand decreases when the price falls.

3. Speculation

Speculation on prices is a also cause for upward sloping demand curve. A typical example for this scenario is stock market trading. When a price of a share rises, people tend to buy the share more on the expectation that the price will rise further. Similarly, when the price falls, people tend to sell the share expecting that the price will fall further.

© 2013 Sundaram Ponnusamy

Comments

    0 of 8192 characters used
    Post Comment

    • profile image

      DEBORAH MURNA 

      3 years ago

      KEEP IT UP.MAY GOD ADD MORE KNOWLEDGE 2 U.

    • profile image

      Shreedhar 

      4 years ago

      Thanks for this side

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, owlcation.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://owlcation.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)