Law of Demand Explained: Definition, Meaning, Reasons & Exceptions

Demand in economics terminology refers to a desire of a person to buy goods or services backed by his financial ability. Money or equivalent and willingness are the two things necessary for demand. if you have one thing but lack other thing, then it won’t be called as demand.

Demand is when the individual posses two things – resources(money) and willingness. Demand reflects when an individual is willing to spend his resources in order to fulfill his or her needs or desire.

So, in nutshell demand is – desire + ability + willingness. Any one of these elements if absent, would not be called as demand.  For example, you have a desire to buy your own airplane, it is just a desire not your demand.

Yes, when you have the required amount of money plus you have the willingness to buy it, then it is referred as demand. Now, let’s get ahead to understand – what is law of demand?  


The law of demand states – demand of  a product per unit of time increases when its price falls and decreases when its price goes up other factors such as tastes, preferences, expectations, complementary goods, income remaining unchanged or constant. In short, we can say that law of demand just expresses the relationship between price and demand of a product only.

 Look, if the price of a coffee cup increases from $1 – $2, its demand will decrease as per the law of demand and vice versa.  So, law of demand just defines – demand of a product depends upon its price. If price of the product is fluctuated, it will affect its demand.


Economics Tutor:  On what basis the law of demand works is what you are going to learn now under this sectionThere are few reasons behind the mechanism of law of demand – income effect, substitution effect, diminishing marginal utility which are all explained as following:

  • Income effect: When price of a product falls, the purchasing power of consumer increases in relation with the same product. Purchasing power is also known as real income of a consumer. Since customer has to pay less amount for the same product, it encourages the demand for the product. This increase in demand with the increase in purchasing power of customer is called as income effect.
  • Substitution effect: Let’s me clear the meaning of substitute product first. Substitute product is the one which we serves the same purpose. For example, when price of tea decreases and the price of coffee(Substitute ) remains unchanged, it makes coffee costlier. So it increases demand for tea. This increase in demand due to unchanged price in substitutes is called as substitution effect.
  • Diminishing marginal utility: This factors is also responsible for increase in demand for a product when its price falls. In simple words, when you buy more and more of a commodity, your satisfaction level decreases with each additional unit. So then do not take that product again right, this leads increase in stock and thus prices fall which in turn leads to increase in demand.


Economics Tutor: Where doesn’t law of demand apply up, will now be explained under this section.Law of demand does not apply when consumers expect increase in future prices for a commodity especially durable ones such as gold.

It does not have any value for status goods(Gold). The goods which serve as status symbol in a society. Another category of goods, where it does not apply are Giffen goods. These might be the inferior goods mostly consumed by poor households. It also remains silent when prices of  necessary goods such as rice,  salt, sugar falls or goes up.

Law of Demand Explained: Definition, Meaning, Reasons & Exceptions

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