Law of Demand Explained with Examples and Key Multiple Choice Questions
The law of demand is a vital economics concept explaining the relationship between the price of a good and the quantity people are willing to buy. It is fundamental to understanding how markets function and is frequently tested in school board exams and competitive entrance tests. Mastering the law of demand can also help you make better business and personal finance decisions.
| Aspect | Description | Example |
|---|---|---|
| Law of Demand Statement | As price increases, quantity demanded decreases (vice versa), all else equal. | If bread price rises from ₹20 to ₹30, fewer people buy bread. |
| Graphical Representation | Downward-sloping demand curve from left to right. | Demand Schedule table or demand curve graph |
| Key Assumptions | No change in income, tastes, or prices of related goods during analysis. | Comparing demand only when other factors are held constant. |
| Exceptions | Giffen goods, Veblen goods, necessities, etc., may not follow the law. | Luxury fashion, basic staple foods in rare scenarios |
Law of Demand: Meaning and Importance
The law of demand states that, when other factors remain unchanged, the quantity demanded of a product falls as its price rises and increases when the price falls. This principle helps predict consumer behavior and is the basis for market analysis in both microeconomics and business settings.
Law of Demand MCQs with Answers
Practicing law of demand multiple choice questions (MCQs) sharpens your understanding for school and competitive exams. Here are some exam-focused MCQs with explained answers:
-
When the price of a commodity increases, what usually happens to its quantity demanded?
- (a) Increases
- (b) Decreases
- (c) Remains unchanged
- (d) May increase or decrease
-
Which circumstance can cause a change in quantity demanded and not demand?
- (a) Change in consumer income
- (b) Change in tastes
- (c) Change in price of the good itself
- (d) Change in prices of other commodities
-
If consumers' income increases and the good is a normal good, what happens to demand?
- (a) Decreases
- (b) Increases
- (c) Remains same
- (d) Becomes zero
-
Which diagram shows the law of demand?
- (a) Upward sloping curve
- (b) Parallel to x-axis
- (c) Downward sloping curve
- (d) Parallel to y-axis
-
The law of demand may not hold in the case of:
- (a) Giffen goods
- (b) Normal goods
- (c) Inferior goods
- (d) Substitute goods
-
An increase in demand shifts the curve:
- (a) Rightward
- (b) Leftward
- (c) Downward
- (d) Upward along same line
Law of Demand vs Change in Quantity Demanded
| Concept | What Changes? | Graph Impact | Example |
|---|---|---|---|
| Change in Quantity Demanded | Caused by own price change | Movement along demand curve | Price falls, more units demanded |
| Change in Demand | Caused by factors other than price (income, tastes) | Shift of demand curve | Population or income increases, curve shifts right |
Exceptions to Law of Demand
- Giffen Goods: Basic staple items that see higher demand at higher prices due to strong income effect.
- Veblen Goods: Luxury items where higher price increases status appeal, so demand rises with price.
- Essential Items: Necessities that people must buy, regardless of price — e.g., salt, life-saving medicines.
Understanding these exceptions is important for answering advanced MCQs and for practical economics.
Law of Demand: Related Concepts and Links
A solid understanding of the law of demand opens the door to deeper commerce topics. For example, exploring elasticity of demand helps analyze how sensitive quantity demanded is to price. You can also read about the Law of Demand for more diagrams, or compare demand curve movement vs shift for MCQ clarity.
Real-World Applications and Use Cases
The law of demand is frequently used by businesses for setting prices, by policymakers to predict market responses, and appears in competitive exams like UPSC, SSC, and NEET Commerce streams. Students often face scenario-based MCQs on this in class 11 and class 12 economics.
Summary
The law of demand is a cornerstone of economics, explaining how price changes influence buying decisions. Understanding its details, exceptions, and related concepts is essential for exams and smarter financial choices. At Vedantu, we simplify commerce topics to build lasting understanding for exams and future careers.
FAQs on MCQs on Law of Demand: Practice Questions and Answers
1. What is the law of demand?
The law of demand states that, all other factors being equal, as the price of a good or service increases, the quantity demanded will decrease, and vice versa. This inverse relationship between price and quantity demanded is fundamental to economics.
2. Why does the law of demand work inversely with price?
The inverse relationship between price and quantity demanded stems from several factors: consumer behavior (consumers tend to buy less when prices are high), the substitution effect (consumers switch to cheaper alternatives), and the income effect (higher prices reduce purchasing power). This is a core concept for understanding market dynamics and demand curves.
3. What are the main assumptions of the law of demand?
The law of demand relies on certain assumptions, including: consumer preferences remain constant, consumer income remains stable, prices of related goods remain unchanged, and there are no changes in consumer expectations. These assumptions help isolate the relationship between price and quantity demanded. Understanding these assumptions is critical for interpreting demand schedules and demand functions.
4. What are the exceptions to the law of demand?
While generally true, the law of demand has exceptions. Giffen goods (inferior goods where demand increases as price rises) and Veblen goods (luxury goods where demand increases with price due to prestige) are notable examples. These exceptions highlight situations where other factors significantly outweigh the price effect on demand. These exceptions are also important for understanding price elasticity of demand.
5. How is the law of demand represented on a graph?
The law of demand is graphically represented by a downward-sloping demand curve. This curve shows the inverse relationship between price (on the vertical axis) and quantity demanded (on the horizontal axis). Understanding the demand curve is essential for interpreting market equilibrium and understanding changes in demand vs. changes in quantity demanded.
6. Name two examples of goods that do not follow the law of demand.
Two examples of goods that may not follow the law of demand are Giffen goods (e.g., low-quality staple foods, where increased price leads to increased demand due to budget constraints) and Veblen goods (e.g., luxury items, where higher prices signal higher quality and social status, increasing demand). These exceptions highlight the complexities of consumer behavior and demand theory.
7. What is the difference between 'change in demand' and 'change in quantity demanded'?
A change in quantity demanded refers to a movement *along* the demand curve caused solely by a change in the price of the good. A change in demand, however, represents a *shift* of the entire demand curve, caused by factors *other than* price (e.g., consumer income, consumer tastes, prices of related goods). Understanding this distinction is critical for mastering demand analysis.
8. What are the assumptions of the law of demand?
The law of demand operates under several key assumptions: consumer tastes and preferences remain constant, consumer income levels are unchanged, prices of related goods remain the same, and there are no changes in consumer expectations regarding future prices. If any of these assumptions are violated, the relationship between price and quantity demanded may be altered.
9. What is law of demand with example?
The law of demand states that as price increases, quantity demanded decreases, and vice versa, ceteris paribus (all else being equal). For example, if the price of apples rises, consumers will likely buy fewer apples, perhaps opting for cheaper alternatives like bananas. This illustrates the inverse relationship between price and quantity demanded.
10. How does income affect the law of demand?
Income plays a significant role in influencing demand. Changes in consumer income can cause a shift in the demand curve. For normal goods, increased income leads to increased demand, and decreased income leads to decreased demand. For inferior goods, the opposite occurs; demand decreases with rising income and increases with falling income. This concept is directly related to income elasticity of demand.
