EXCEPTIONS TO THE LAW OF DEMAND

Learning Contents:

·          Situations where the law of demand is not applicable. 

 

Exceptions to the Law of Demand

Exceptions to the Law of Demand indicates situations where the law of demand does not apply. In the reality, there exist some situations where the quantity demand of a commodity increases with rise in price and decreases with a fall in price and therefore the demand curve slopes upward from left to right.  The following points highlight the exceptions to the law of the demand

1.   Articles of Distinction /Veblen Goods / Goods of Ostentation / Snob appeal

The concept of Veblen good was propounded by the famous economist Thorstein Veblen, who introduced the theory of “conspicuous consumption”. Veblen goods are the goods of social distinction such as designer jewelry, precious diamonds, luxury cars, watches, bags, etc. The price effect is positive i.e. when the price of a Veblen good goes up, the demand also goes up; when the price of a Veblen goes down, the demand also goes down. Therefore, the demand curve for Veblen good is upward sloping. Consumers purchase these goods in order to reveal their status in society. They attach value to these goods only when their prices are high. Otherwise, they would no longer be considered as goods of social distinction. For e.g. if the price of diamonds falls, people will buy less of them because they are only purchased when their prices are high. Therefore, Veblen good is an exception to the law of demand.

2. Giffen Goods

Giffen goods are the special kinds of inferior goods that lack close substitutes represent a large amount of consumer’s income and their demand rises with an increase in prices and demand falls with a decrease in prices. This happens due to the necessity and limited income of a consumer. Sir Robert Giffen observed the purchasing habits of Victorian families in Britain. He noticed that when the price rose, lower-income households reduced the purchase of more expensive goods such as meat and purchased more bread in order to keep them alive despite its price got increased. For such goods, the demand curve will be upward sloping. However, this paradox has remained only in a theoretical concept and it has no existence in the real world.

3. Expectations of future price rise

When a consumer expects that the price of a good will rise in the future, he will buy more of that good today even if its current price is high. On the other hand, if he expects the price to fall in the future, he will buy less today. So, the current demand for goods is increased on the basis of expectations about the future rise in price without its actual rise in price and vice-versa. An example would be that sometimes, consumers start buying and storing more of the vegetables such as onions, tomatoes, etc. in the fear of an increase in their prices, which results in an increase in demand. Therefore, it violates the law of demand.

4. Necessary Goods and Services

Necessity goods also violate the law of demand as people continue to consume the necessary goods such as medicines, basic staples such as sugar, salt, wheat, rice, etc. even if there is a price rise. The demand for such goods is unaffected by its price change. Therefore, the demand curve would be a vertical straight line in case of necessary goods that violates the law of demand.

5. Consumer ignorance

Many times, a consumer gets ready to pay a high price for a good when he is unaware of its features, specifications, quality, etc. So, consumer judges the quality of a good on the basis of its price. He further assumes that a high-priced good is better in quality than a low-priced good. As a result, the demand is increased at a high price. In such a situation, the law of demand does not hold true.

6. Fear of Shortage

If a consumer expects a shortage or scarcity of a particular good in the near future, then he would buy more of that good in the current period even if its price is rising. A consumer demand more due to fear of a further rise in price. For example, during emergencies like war, flood, drought, or any other situations consumers would store as much as possible even at higher prices due to fear of shortage and general insecurity. Therefore, the law of demand is also not applicable in this situation.

7. Brand Loyalty

The law of demand is also not applicable when a consumer develops a preference for a particular brand. Sometimes consumers are very loyal to particular brands and reluctant to switch to other brands. They buy the products of that brand regardless of the change in price. For example, a consumer if prefers to wear Levi’s jeans will continue to buy even if its price is increased. In this situation, the law of demand fails to be applicable.

Let’s try some questions

Choose the Correct Answer

1. Which of the following is a Veblen Good?

a. Potatoes

b. Salt

c. Luxury Car

d. None of the above

2. Which of the following is a Giffen Good?

a. Coarse grains

b. Branded Bags

c. Electronic items

d. Car

3. The exception to the law of demand is

a. Veblen good

b. Giffen good

c. Normal good

d. Both a and b

4. The demand curve for the necessary goods is

a. Straight line parallel to OY-axis

b. Upward Sloping

c. Downward sloping

d. None of above



5. Price and demand are positively correlated in the case of:

a. Necessities

b. Comforts

c. Giffen Goods

d. Luxuries



6. In case of Giffen’s paradox, the slope of the demand curve is

a. negative

b. positive

c. parallel to X-axis

d. parallel to Y-axis

7. For a Giffen good, when the price falls

a. Demand increases at a faster rate

b. Demand decreases

c. Demand remains constant

d. Demand curve has a negative slope

Answer Key

1.c	2.a	3.d	7.b
4.a	5.c	6. b

 

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