Are looking for Exceptions to the Law of Demand .In This Article we will Meaning Of Law Of Demand,Expectations regarding future price,Prosperity and depression,Giffen goods,Ignorance,Change in fashion, habit and preference & Prestigious goods.
- Meaning Of Law Of Demand
- Exceptions to the Law of Demand
- FAQs Exceptions to the Law of Demand
Meaning Of Law Of Demand
The Law of Demand states that, generally, the demand for a commodity increases as its price decreases, and conversely, the demand decreases as the price increases. In other words, there is an inverse relationship between the price of a good and the quantity demanded.
However, it’s important to note that while the Law of Demand is a fundamental principle in economics, there are instances where it may not hold true. These situations, where the expected relationship between price and demand doesn’t apply, are referred to as exceptions to the law.
These exceptions can be influenced by various factors such as the type of good (Veblen goods, Giffen goods), shifts in consumer preferences, external economic conditions, or unique market dynamics. Recognizing these exceptions is crucial for a more nuanced understanding of consumer behavior and market dynamics.
Also Check : What is Demand ? 5 Types Of Demand
Exceptions to the Law of Demand
Some of the exceptions are as follows:
Expectations regarding future price
When consumers expect a continuous rise in the price of a durable commodity, they buy more of it despite the rise in its price and then demand increases. Similarly, when consumers expect a further fall in price, they postpone their purchase, as a result demand decreases.
Prosperity and depression
People prefer to buy more things during times of overall prosperity, even when prices rise. This tendency is a result of consumers’ greater purchasing power. Individuals often enjoy better salaries, more job security, and an overall sense of financial well-being when the economy is prospering.
As a result, individuals are more likely to spend money, and increased costs may have less of an influence on their buying decisions. higher consumer confidence and stronger economic conditions contribute to higher expenditure, supporting economic expansion during prosperous times.
Giffen goods are those goods which are demanded more at a higher price and less at the lower price. In other words, price effect is positive and income effect is negative in case of Giffen goods. It is consumed mostly by poor households. If the price of such goods increases, its demand will increase instead of decreasing.
For example, suppose the monthly minimum consumption of food grains by a poor household is 30 kg including 20 kg maize (an inferior good) and 10 kg of wheat (a superior good). Suppose that price per kg of maize is Rs. 5 and wheat is Rs. 10. At these prices, the household spends Rs. 200 per month on food grain.
As the price of maize increases to Rs. 6, the household will be forced to reduce the consumption of wheat and increase the demand of maize in order to meet its minimum monthly consumption requirement within Rs. 200 per month. In this situation, maize is Giffen good.
If a consumer is unaware of the competitive price of a commodity, they may end up buying more of it even at a higher price. This can happen because higher-priced goods are often perceived as superior in quality.
In such cases, the consumer’s attitude and lack of information about market prices can make the traditional Law of Demand less effective. The usual expectation that demand decreases as price increases may not hold if consumers believe that higher prices correlate with better quality, and their purchasing decisions are influenced by this perception.
Change in fashion, habit and preference
Changes in fashion, habits, and preferences of consumers can play a significant role in rendering the Law of Demand less effective. When consumer tastes shift, habits evolve, or fashion trends change, the traditional relationship between price and demand can be disrupted. Consumers may be willing to buy more of a product even at higher prices if it aligns with the current trends or satisfies their evolving preferences.
In such cases, the impact of price changes on demand becomes intertwined with the dynamic and sometimes unpredictable nature of consumer behavior, making the application of the Law of Demand less straightforward.
The Law of Demand doesn’t always hold for goods that serve as status symbols, enhance social prestige, or display wealth and richness. Items like gold, precious stones, rare paintings, and other prestigious goods often operate outside the traditional expectations of the law.
In these cases, the demand for such goods may not decrease even if the price rises. The symbolic or luxury value attached to these commodities can override the typical inverse relationship between price and demand, highlighting the unique dynamics at play in the market for prestigious items.
FAQs Exceptions to the Law of Demand
Can you give examples of goods that defy the Law of Demand?
Yes, goods like Veblen goods (where demand increases as price increases) and Giffen goods (where an increase in price leads to an increase in demand) are examples of exceptions.
Why do Veblen goods go against the Law of Demand?
Veblen goods are considered as status symbols, and their demand may increase with higher prices because the higher price itself enhances their perceived value.
What is a Giffen good and how does it violate the Law of Demand?
A Giffen good is a product for which an increase in price can lead to an increase in demand, often due to income effects outweighing substitution effects, particularly in the case of essential goods for lower-income individuals.