Question 1: Critically discuss the Law of demand along with the reasons for downward sloping of demand curve

Introduction

The Law of Demand constitutes one of the most fundamental propositions in microeconomic theory. It expresses a universal behavioural tendency: consumers ordinarily purchase larger quantities of a commodity at lower prices and smaller quantities at higher prices. This inverse price–quantity relationship reflects rational economic behaviour, diminishing marginal utility, and the combined influence of income and substitution effects. As such, the Law of Demand forms the analytical basis for understanding consumer behaviour, demand schedules, and price-output determination in competitive markets.

Explanation of the Law of Demand

The Law of Demand states that, ceteris paribus, the quantity demanded of a commodity varies inversely with its price. Thus, when the price of a commodity rises, its quantity demanded falls; when the price falls, quantity demanded increases. This behaviour results from the rational attempts of consumers to maximise satisfaction subject to their budget constraints.

Assumptions of the Law of Demand

1. There is no change in consumer tastes, preferences, or habits.
2. Consumer’s money income and purchasing power remain unchanged.
3. Prices of substitute and complementary goods remain constant.
4. Population size and distribution remain unchanged.
5. There are no expectations of future price changes.
6. Quality of the commodity remains constant.

Why Does the Demand Curve Slope Downward?

1. Diminishing Marginal Utility: Each additional unit of a commodity yields lesser satisfaction than the previous one. Consumers buy more only at a lower price, creating an inverse price–quantity relation.
2. Substitution Effect: When the price of a commodity rises, other goods become relatively cheaper, inducing consumers to substitute away from the costlier good.
3. Income Effect: A rise in price reduces real income, reducing demand for normal goods. A fall in price increases real income, increasing demand.
4. Entry of New Consumers: At lower prices more consumers (especially low-income buyers) enter the market, increasing total demand.
5. Multiple Uses of Commodities: Goods like electricity or milk have multiple uses. When price falls, consumers extend consumption to secondary uses, increasing demand.

Exceptions to the Law of Demand

1. Giffen Goods: Highly inferior goods where a strong positive income effect outweighs the substitution effect, producing an upward-sloping demand curve.
2. Veblen Goods: Prestige or status goods (e.g., luxury brands) whose higher prices increase desirability.
3. Speculative Demand: Expectation of future price rises may increase demand even at higher prices.
4. Necessities: Goods with almost no substitutes show highly inelastic demand.
5. Future Expectations: Anticipated shortages or price hikes may raise current demand.

Conclusion

The Law of Demand remains one of the most consistent generalisations in economic analysis. Its validity stems from powerful behavioural foundations such as diminishing marginal utility, the income–substitution mechanism, and rational consumer choice. Although exceptions exist, they operate under special and identifiable conditions and do not undermine the universal tendency of consumers to purchase more at lower prices and less at higher prices.