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Exceptions To The Law of Demand

The document discusses exceptions to the law of demand. It explains that according to the law of demand, quantity demanded decreases with price. However, there are some exceptions where demand increases with price. These include Giffen or inferior goods, where a price decrease leads consumers to buy more superior goods. Speculation and expectations about future price changes can also cause demand to rise with current price. Prestige and branded goods may see increased demand even at higher prices as consumers wish to demonstrate status.

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Priya Sowmya Kolichala
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4K views

Exceptions To The Law of Demand

The document discusses exceptions to the law of demand. It explains that according to the law of demand, quantity demanded decreases with price. However, there are some exceptions where demand increases with price. These include Giffen or inferior goods, where a price decrease leads consumers to buy more superior goods. Speculation and expectations about future price changes can also cause demand to rise with current price. Prestige and branded goods may see increased demand even at higher prices as consumers wish to demonstrate status.

Uploaded by

Priya Sowmya Kolichala
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Law of Demand:

According to Law of Demand, other things being constant, if the price of a commodity increases, the quantity demanded of it will decline and vice-versa.

Exception to the Law:


Some times, we find that with a fall in the price demand also falls and with a rise in price demand also rises. These cases are referred to as exceptions to the general law of demand. The demand curve in these cases will be an upward sloping. Some of these exceptions are: 1. 2. 3. 4. Giffen goods or Inferior goods. Prestige goods Speculation Price Illusion These different types of exceptions are described in brief explanation as follows:

Inferior goods:
Some goods like potato, bread, vegetable oil etc. are called inferior goods. In the case of these goods when their price falls, the real income or the purchasing power of the consumer increases, this purchasing power is used to buy other superior goods. Such inferior goods are named as 'Giffen goods'. An Irish economist Sir Robert Giffen observed this tendency of the individuals in the 19th century.

Expectations and speculations:


When people expect a rise or fall in price in the near future, the law of demand does not hold good. If a price rise is expected by next week, then they will buy more now itself though at present the prices are quite high.

Prestige goods:
Rich people like to show off their economic status. SO they buy prestige goods like colour T.V., diamond etc. even at a higher price.

Price illusion:
There are certain consumers those who are always guided by the price of the commodity. They always believe that higher the price, better the quality. Hence they purchase larger quantities of high priced goods.

Demonstration effect:
It refers to a tendency of low income groups to imitate the consumption pattern of high income groups. They will buy a commodity to imitate the consumption of their neighbors even if they don't have the purchasing power.

Ignorance:
Sometimes due to ignorance of existing market price, and people buy more at a higher price.

Quality and Branded Goods:


Commodities of good standard and quality give proper value for money. They last long and give good service. So people prefer to buy them even at a higher price. In the above exceptional cases, the demand graph curve slopes upward showing a positive relationship between price and demand.

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