Fundamentals of Business Economics and Management · The Fundamentals of Economics

Demand and Law of Demand for CMA Foundation

Updated 10 October 2026 · Fact-checked

Demand is the quantity of a good a buyer is willing and able to buy at a given price in a given period. The law of demand says that, other things equal, a fall in price raises quantity demanded and a rise in price lowers it. The demand curve slopes downward.

Understand Demand and Law of Demand

Demand is not just a wish. It needs three things: willingness to buy, ability to pay, and a stated price and time period. A person who wants a car but cannot afford it does not create demand.

The law of demand says that, other things remaining the same, the quantity demanded of a good moves in the opposite direction to its price. If the price of tea falls from ₹20 to ₹10 a cup, people buy more cups. The phrase "other things remaining the same" (ceteris paribus) is the key condition. Income, tastes and prices of other goods must not change.

Why does the law hold? Three reasons are usually given. First, diminishing marginal utility: each extra unit gives less satisfaction, so you will buy more only at a lower price. Second, the income effect: a lower price raises your real purchasing power. Third, the substitution effect: a cheaper good replaces costlier alternatives.

A demand schedule is a table of prices and quantities demanded. Plotting it with price on the Y-axis and quantity on the X-axis gives the demand curve, which slopes downward from left to right. An individual demand schedule is for one buyer. A market demand schedule is the sum of all individual quantities at each price.

The most tested idea is movement versus shift. A change in the good's own price causes a movement along the same curve: an extension (price falls, quantity rises) or a contraction (price rises, quantity falls). A change in any other determinant shifts the whole curve: an increase in demand shifts it right, a decrease shifts it left.

Key formulas to remember

Law of demand: Price ↑ ⇒ Quantity demanded ↓ ; Price ↓ ⇒ Quantity demanded ↑ (other things equal); Inverse relationship. Demand curve slopes downward.
Demand function: Dx = f(Px, Py, Y, T, E, N …); Px is own price, Py is price of related goods, Y is income, T is tastes, E is expectations, N is number of buyers.
Market demand: Market demand at a price = Σ individual demands at that price; Add quantities horizontally, not prices.
Movement along the curve: Own price changes ⇒ extension or contraction of demand; The curve does not move.
Shift of the curve: Any other determinant changes ⇒ increase (right shift) or decrease (left shift) in demand; Price stays on the Y-axis; the whole curve moves.
Exceptions to the law: Giffen goods, Veblen (conspicuous) goods, expectation of price change, necessities in emergencies; Here a price rise may be accompanied by higher quantity demanded.

How to solve Demand and Law of Demand questions

Most questions test definitions, determinants, or whether a situation is a movement or a shift. Use this method.

1Read the question and find out what changed. Is it the good's own price or something else?
2If the own price changed, answer with a movement along the curve: extension if price fell, contraction if price rose.
3If income, tastes, price of a related good, expectations or number of buyers changed, answer with a shift of the curve.
4For a shift, decide the direction. Higher demand at every price means a right shift; lower means a left shift.
5For related goods, check the type. Substitute price up raises demand for the good. Complement price up lowers it.
6For income, classify the good. Normal goods rise with income. Inferior goods fall with income.
7For numerical or table questions, read quantities at each price and check that the pattern is inverse. If not, look for an exception such as a Giffen good.

Quickest way: Own price or something else?

When to use it: Use for any MCQ asking about movement, shift, increase or decrease in demand.

Ask one question: did the good's own price change?
Yes: movement along the curve. Say extension or contraction.
No: shift. Work out the direction using the determinant.
Remember the words: extension and contraction are for movement; increase and decrease are for shift.
Eliminate options that mix the wrong words, such as an increase in demand caused by a fall in the own price.

Common mistakes in Demand and Law of Demand

Calling a fall in own price an increase in demand.
In daily language, more buying is called more demand.
Fix: Own price change means extension or contraction in quantity demanded. Increase or decrease in demand is only for a shift.
Forgetting that the law needs other things to stay equal.
Students memorise only the price-quantity link.
Fix: Always include ceteris paribus in definitions. Without it, the law cannot be stated correctly.
Treating all exceptions as the same thing.
Giffen and Veblen goods are both said to have upward-sloping demand.
Fix: Giffen goods are inferior goods that take a large share of a poor buyer's budget. Veblen goods are luxury goods bought for status, where a high price itself attracts buyers.
Confusing substitutes and complements.
The direction of the effect is reversed for each.
Fix: If the price of a substitute such as coffee rises, tea demand rises. If the price of a complement such as sugar rises, tea demand falls.
Thinking an inferior good is a bad-quality good.
The word inferior sounds like poor quality.
Fix: An inferior good is one whose demand falls when income rises, such as coarse grain for some households.
Drawing price on the X-axis.
Habit from other graphs.
Fix: In economics, price goes on the Y-axis and quantity on the X-axis.

Worked examples

Example 1

The price of a packet of biscuits falls from ₹10 to ₹8 and a buyer's purchases rise from 4 packets to 6 packets. Income and tastes are unchanged. What has happened to the demand curve?

Show the solution

Identify the change: the own price of biscuits fell from ₹10 to ₹8.
Other determinants such as income and tastes are unchanged.
So the buyer moves along the same demand curve to a lower price.
Quantity demanded rose from 4 to 6 packets, which is an extension of demand.

Answer: There is a movement along the same demand curve, an extension of demand. The curve does not shift.

Example 2

Three buyers demand the following packets of rice at ₹50 per kg: A buys 5 kg, B buys 3 kg, C buys 2 kg. At ₹40 per kg they buy 7 kg, 4 kg and 4 kg. Find market demand at each price. Then say what happens to the curve if incomes of all three rise and rice is a normal good.

Show the solution

Market demand at ₹50 = 5 + 3 + 2 = 10 kg.
Market demand at ₹40 = 7 + 4 + 4 = 15 kg.
The fall in price from ₹50 to ₹40 raised quantity demanded from 10 kg to 15 kg, consistent with the law of demand.
Now incomes rise. Rice is a normal good, so people want more at every price.
This is a change in a determinant other than own price, so the curve shifts.

Answer: Market demand is 10 kg at ₹50 and 15 kg at ₹40. A rise in income for a normal good causes an increase in demand, a rightward shift of the demand curve.

Exam tips

Look for the words extension, contraction, increase and decrease in the options. They decide the answer quickly.
Learn the list of determinants and the direction of effect for substitutes, complements and inferior goods.
Giffen and Veblen goods appear often as exceptions. Remember Giffen is about inferior staples and Veblen is about status.
In table questions, add quantities across buyers at the same price to get market demand.
With no negative marking, always attempt every question and eliminate wrong options first.

Practice questions from The Fundamentals of Economics

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 law of demand and its exceptions?

The law says that, other things equal, quantity demanded falls when price rises and rises when price falls. Exceptions include Giffen goods, Veblen goods, expectations of further price changes, and some necessities in emergencies.

What is the difference between a movement and a shift in the demand curve?

A movement happens along the same curve when the good's own price changes. A shift happens when another determinant such as income, tastes or the price of related goods changes, so the whole curve moves right or left.

What are the main determinants of demand?

The main determinants are the price of the good, price of related goods, income of consumers, tastes and preferences, expectations about future prices, and the number of buyers. Seasons and population structure also matter.

How do you draw a demand curve from a schedule?

Put price on the Y-axis and quantity on the X-axis. Plot each price-quantity pair from the schedule as a point. Join the points to get a downward-sloping line or curve.

What is the difference between Giffen and Veblen goods?

A Giffen good is a low-quality staple that takes a large part of a poor household's budget, so a price rise can increase its demand. A Veblen good is a luxury bought for prestige, so a higher price can make it more attractive.