Business Economics · How competitive markets operate

Demand and the Law of Demand Explained

Updated 11 October 2026 · Fact-checked

Demand is the quantity of a good buyers are willing and able to buy at each price, other things equal. The law of demand says that when price rises, quantity demanded falls, and vice versa. A price change moves you along the curve. Any other factor shifts the whole curve.

Understand Demand and Law of Demand

Demand is not just wanting something. It means being willing and able to pay. A person who wants a car but has no money adds nothing to demand. Economists call this effective demand.

A demand schedule lists the quantity buyers will purchase at each price in a given period. A demand curve plots it, with price on the vertical axis and quantity on the horizontal axis. Market demand is the sum of all individual demands at each price.

The law of demand says: if price rises, quantity demanded falls, ceteris paribus (all other factors held constant). So the curve slopes downward. Three reasons are usually given. The substitution effect: a dearer good makes buyers switch to cheaper alternatives. The income effect: a higher price cuts real purchasing power, so you buy less. Diminishing marginal utility: each extra unit gives less satisfaction, so you will pay less for it.

The most tested idea is the difference between two terms. A change in the good's own price causes a change in quantity demanded, which is a movement along the same curve. A change in any other factor causes a change in demand, which is a shift of the whole curve. A shift right is an increase in demand. A shift left is a decrease.

The main determinants (shifters) of demand are: consumer income, prices of related goods (substitutes and complements), tastes and fashion, expectations about future prices or income, population size and structure, and advertising. For a normal good, higher income raises demand. For an inferior good, higher income lowers demand. Exceptions to the law, such as Giffen goods and Veblen (prestige) goods, are rare and need special conditions.

Key rules to remember

Law of demand: Price ↑ ⇒ Quantity demanded ↓ (ceteris paribus); Gives a downward-sloping demand curve. Valid only if other factors stay constant.
Linear demand function: Qd = a − bP; a is the quantity demanded at zero price, b > 0 is the slope in quantity terms. A change in P moves you along the line. A change in a shifts the line.
General demand function: Qd = f(P, Y, Pr, T, E, N); P own price, Y income, Pr related goods' prices, T tastes, E expectations, N population. Only P causes movement along the curve.
Market demand: Q market = Σ Q individual at each price; Add quantities horizontally at each price, not prices.
Direction of shifts: Substitute price ↑ ⇒ demand ↑; Complement price ↑ ⇒ demand ↓; Normal good income ↑ ⇒ demand ↑; Inferior good income ↑ ⇒ demand ↓; Use these four rules to decide the direction of any shift.

How to solve Demand and Law of Demand questions

Use this method for any question on demand, whether it is a short MCQ or a written case.

1Name the good and the market, and state that all else is held constant.
2Ask what changed. Is it the good's own price, or something else?
3If it is the own price, show a movement along the same demand curve and call it a change in quantity demanded.
4If it is any other factor, identify it (income, related goods, tastes, expectations, population, advertising) and decide the direction using the shift rules.
5Draw or describe the curve: label axes P and Q, the original curve D1 and the new curve D2, and show the direction of the shift.
6State the effect in words: increase or decrease in demand, and what happens to quantity demanded at each price.
7If asked about market effects, link to supply and equilibrium, and note the result depends on the supply curve.
8Conclude with one sentence that uses the correct term, either 'change in quantity demanded' or 'change in demand'.

Quickest way: Own price or something else?

When to use it: Use this for MCQs that ask whether a situation causes a movement along or a shift of the demand curve.

Find the good in the question.
Check if its own price changed. If yes, it is a movement along the curve.
If no, it is a shift. Identify the factor.
Pick the direction: substitute price up gives right, complement price up gives left, normal good income up gives right, inferior good income up gives left.
Choose the option with the matching term and direction.

Common mistakes in Demand and Law of Demand

Saying a fall in price 'increases demand'.
In everyday speech, demand and quantity bought mean the same thing.
Fix: A price fall increases quantity demanded. Demand itself, meaning the curve, does not change.
Shifting the curve when the own price changes.
Students want to show the effect on the diagram and redraw the curve.
Fix: Keep the curve fixed and move along it. Only draw a new curve for non-price factors.
Getting the direction wrong for complements.
Students confuse substitutes and complements.
Fix: If the price of petrol rises, demand for cars falls (complements move opposite). If the price of tea rises, demand for coffee rises (substitutes move the same way).
Treating all goods as normal goods when income changes.
Most examples use normal goods, so the rule feels universal.
Fix: Check whether the good is inferior. Higher income lowers demand for inferior goods.
Forgetting ceteris paribus and the horizontal addition of market demand.
Students rush the definition and add prices across individuals.
Fix: Always state that other factors are constant. For market demand, add quantities at each price.
Calling every upward-sloping case a breach of the law of demand.
Students mix up rising price with rising demand over time, for example when expectations or income also change.
Fix: Check whether other factors changed. A rise in price and quantity together may be a demand shift, not a break in the law.

Worked examples

Example 1

The demand function for a good is Qd = 120 − 4P, where P is in rupees and Qd in units. (a) Find the quantity demanded at P = ₹10 and at P = ₹15. (b) Income rises and demand becomes Qd = 150 − 4P. Find the quantity demanded at P = ₹10 and describe the change.

Show the solution

At P = 10: Qd = 120 − 4 × 10 = 120 − 40 = 80 units.
At P = 15: Qd = 120 − 4 × 15 = 120 − 60 = 60 units.
So when price rises from ₹10 to ₹15, quantity demanded falls from 80 to 60. This is a movement along the curve, consistent with the law of demand.
After the income rise at P = 10: Qd = 150 − 4 × 10 = 150 − 40 = 110 units.
At the same price of ₹10, quantity demanded rose from 80 to 110. The intercept rose from 120 to 150 and the slope is unchanged, so the curve shifted right in parallel.
Since quantity rose at an unchanged price, this is an increase in demand. The good is a normal good because higher income raised demand.

Answer: (a) 80 units at ₹10 and 60 units at ₹15, a movement along the curve. (b) 110 units at ₹10, an increase in demand (rightward shift), showing a normal good.

Example 2

Explain what happens to the demand for coffee in each case: (i) the price of tea, a substitute, rises; (ii) the price of coffee itself falls; (iii) a health report says coffee is harmful. State whether each is a movement along or a shift of the demand curve.

Show the solution

(i) Tea is a substitute. A higher tea price makes some buyers switch to coffee. At every coffee price, more coffee is demanded. The coffee demand curve shifts right. This is an increase in demand.
(ii) The coffee price is the good's own price. A fall in price leads to a rise in quantity demanded. The curve does not move. This is a movement down along the demand curve, an extension of quantity demanded.
(iii) The report changes tastes and preferences. At every price, buyers want less coffee. The curve shifts left. This is a decrease in demand.
Summary: only (ii) is a movement along the curve. (i) and (iii) are shifts, to the right and left respectively.

Answer: (i) Shift right, increase in demand. (ii) Movement along the curve, increase in quantity demanded. (iii) Shift left, decrease in demand.

Exam tips

Use the exact terms. Write 'change in quantity demanded' for own-price changes and 'change in demand' for shifts. Examiners award marks for this wording.
Always label your diagram: axes P and Q, curves D1 and D2, and an arrow for the direction. An unlabelled sketch earns little.
In MCQs, first check if the good's own price changed. Many wrong options tempt you with the word 'demand'.
In written answers, state ceteris paribus and name the specific factor. Do not just write 'other factors'.
Link demand to equilibrium when asked about price outcomes. A rightward demand shift with fixed supply raises both equilibrium price and quantity.

Practice questions from How competitive markets operate

Demand and Law of Demand in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Demand and Law of Demand: frequently asked questions

What is the difference between change in demand and change in quantity demanded?

A change in quantity demanded is caused only by a change in the good's own price and is a movement along the same curve. A change in demand is caused by any other factor and shifts the whole curve. Increase means a shift right, decrease means a shift left.

What factors shift the demand curve?

The main factors are consumer income, prices of substitutes and complements, tastes and fashion, expectations about future prices or income, population size and structure, and advertising. Each changes the quantity buyers want at every price.

Why does the demand curve slope downwards?

Three reasons are given: the substitution effect, the income effect and diminishing marginal utility. A higher price makes buyers switch to alternatives, reduces real income, and the extra unit gives less satisfaction, so less is bought.

Are there exceptions to the law of demand?

Giffen goods and Veblen goods are the usual exceptions. They are rare and depend on special conditions, such as a very poor-quality staple that takes a large share of income, or a good bought for prestige. Do not assume them unless the question points to them.