Overview
The law of demand describes the inverse relationship between price and quantity demanded. The British economist Alfred Marshall set it out systematically with the demand curve in Principles of Economics (1890). The key qualifier is "other things being equal" (ceteris paribus): income, prices of other goods, tastes and expectations stay the same while only the good's own price changes.
Why it holds
- Diminishing marginal utility: each extra unit gives less additional satisfaction, so people buy more only at a lower price.
- Substitution effect: when the price rises, buyers switch to goods that are now relatively cheaper.
- Income effect: a higher price reduces how much the same money can buy, i.e. real income, so consumption of normal goods falls.
Slutsky (1915) and Hicks (1939) developed the analysis that splits a price change into these two effects. For normal goods both work in the same direction, so the law of demand clearly holds.
Change in quantity demanded vs change in demand
This distinction is a classic exam point. A change in the good's own price moves the point along the demand curve: a "change in quantity demanded". A change in non-price factors (income, prices of related goods such as substitutes and complements, preferences, expected future prices, population) shifts the whole curve left or right: a "change in demand".
Exceptions
- Giffen goods: inferior goods whose income effect is so much stronger than the substitution effect that quantity demanded rises when the price rises. Marshall introduced the case in a later edition of the Principles, crediting Robert Giffen, and Jensen and Miller (2008) found Giffen behaviour experimentally in rice consumption among poor households in Hunan, China.
- Veblen goods: as with the conspicuous consumption described by Veblen (1899), a high price itself signals status, so demand can rise with price.
- Expectations of further price rises, or using price as a signal of quality, can make the law look broken, but in these cases other things are not equal.
Links to policy
Combined with the law of supply, the law of demand predicts the effects of price controls. A price ceiling set below the market price raises quantity demanded and lowers quantity supplied, causing shortages and queues, while a price floor creates a surplus. The debate over a price floor in the labour market is covered in the economics of the minimum wage, and the idea of the cost of choice in opportunity cost.
Sources reviewed: 2026-10-16
References
- Marshall, A. (1890). Principles of Economics. London: Macmillan.
- Slutsky, E. (1915). Sulla teoria del bilancio del consumatore. Giornale degli Economisti, 51, 1–26.
- Hicks, J. R. (1939). Value and Capital. Oxford: Clarendon Press.
- Veblen, T. (1899). The Theory of the Leisure Class. New York: Macmillan.
- Jensen, R. T., & Miller, N. H. (2008). Giffen behavior and subsistence consumption. American Economic Review, 98(4), 1553–1577.