Economics, 3rd Edition

Do All Demand Curves Slope Downwards?

The law of demand implies that when the price of a good rises, people buy less of it. This law is reflected 

in the downwards slope of the demand curve.

As a matter of economic theory, however,  demand curves can sometimes slope upwards. In other 

words, consumers can sometimes violate the law of demand and buy more of a good when the price 

rises. To see how this can happen, consider Figure 5.17. In this example, the consumer buys two goods –  

meat and potatoes. Initially, the consumer’s budget constraint is the line from point A to point B. The 

optimum is point C. When the price of potatoes rises, the budget constraint shifts inwards and is now the 

line from point A to point D. The optimum is now point E. Notice that a rise in the price of potatoes has led 

the consumer to buy a larger quantity of potatoes.

Why is the consumer responding in a seemingly perverse way? The reason is that potatoes here are a 

strongly inferior good. When the price of potatoes rises, the consumer is poorer. The income effect makes 

the consumer want to buy less meat and more potatoes. At the same time, because the potatoes have 

become more expensive relative to meat, the substitution effect makes the consumer want to buy more 

meat and less potatoes. In this particular case, however, the income effect is so strong that it exceeds 

the substitution effect. In the end, the consumer responds to the higher price of potatoes by buying less 

meat and more potatoes.