The first comprehensive census in Iceland was taken in 1703, at which time 50,358 people were reported. The 18th century was marked by great economic hardship, and by 1801 the population had declined to 47,240. There began a slow increase in the 19th century, and by 1901 the population had risen to 78,470. Accelerated economic growth during the early decades of the 20th century was paralleled by a rapid growth in population, which in 1950 reached 143,973. During World War II and the early postwar period there was rapid improvement in the standard of living and a new acceleration in the rate of population growth. The annual growth rate reached its peak during the 1950s; it has been declining since 1960, primarily because of a sharply reduced birth rate and continued emigration. For a brief period from the late 1980s to the mid-1990s the birth rate rose again before resuming its downward trend. In the late 1980s the population reached a quarter of a million.

The population of Iceland is extremely homogeneous. The inhabitants are descendants of settlers who began arriving in AD 874 and continued in heavy influx for about 60 years thereafter. Historians differ on the exact origin and ethnic composition of the settlers but agree that between 60 and 80 percent of them were of Nordic stock from Norway. The rest, from Scotland and Ireland, were largely of Celtic stock. The dominant language in the period of settlement was Old Norse, the language spoken in Norway at the time. Through the centuries it has evolved into modern Icelandic, which is used throughout the country. There are no racial or ethnic distinctions. The early Nordic and Celtic stocks have long since merged, and the small number of subsequent immigrants have had no major effect on the population structure. The Lutheran faith has been the dominant religion since the mid-16th century. About nine-tenths of the population belongs to the state-supported Evangelical Lutheran church. There is freedom of religion.

Most Icelanders are descendants of Norwegian settlers and Celts from the British Isles, and the population is remarkably homogeneous. According to Icelandic Government statistics, 93% of the nation's inhabitants live in urban areas (localities with populations greater then 200) and about 60% live in Reykjavik metropolitan area. Of the Nordic languages, the Icelandic language is closest to the Old Norse language and has remained relatively unchanged since the 12th century.

About 91% of the population belongs to the state church, the Evangelical Lutheran Church, or other Lutheran Churches. However, Iceland has complete religious liberty, and about 20 other religious congregations are present.

Most Icelandic surnames are based on patronymy, or the adoption of the father's first given name. For example, Magnus and Anna, children of a man named Petur, would hold the surname Petursson and Petursdottir, respectively. Magnus' children, in turn, would inherit the surname Magnusson, while Anna's children would claim their father's first given name as their surname. Women normally maintain their original surnames after marriage. This system of surnames is required by law, except for the descendants of those who had acquired family names before 1913. Most Icelanders, while reserved by nature, rarely call each other by their surnames, and even phone directories are based on first names. Because of its small size and relative homogeneity, Iceland holds all the characteristics of a very close-knit society.