Exceptions of Law of Demand
Law of Demand:
According to the Law of Demand, there is an inverse relationship between the price of the commodity and the quantity demanded or purchased.
But some times it is observed that the more quantity of a commodity is demanded at a higher price and less of it is purchased at a lower price. This is known as exceptions to the law of demand.
In such cases the demand curve may not have negative slope, but it shows Positive /upward sloping.
Reasons for the Upward Sloping of Demand Curve:
1. Giffen Goods
2. Articles of snob Appeal / Status Symbol
3. Emergencies
4. Expectations about Future Prices
5. Quality Price relationship
6. Change in Fashion
1.Giffen Goods :
Giffen Goods are those inferior goods on which the consumer spends a large part of his income and demand for which falls with a fall in their prices.
Giffen goods are named after the nineteenth century economist Sir Robert Giffen who pointed out this phenomenon for the first time.
To understand Giffen goods, we have to understand money income and real income.
# Money Income:
Money income refers to the income of a consumer in terms of some monetary unit like rupees or dollars.
#Real Income :
Real income refers to the purchasing power of the consumer’s money income that is the amount of goods and services that can be purchased with the given money income.
Maize and jowar are inferior food items consumed by poor people.
When the price of maize falls, real income of the consumer rises.
With an increase in real income, a consumer can afford to purchase superior food like – rice and wheat.
Since there is a limit to the intake of food, an increase in demand for wheat or rice would lead to a smaller quantity demanded of maize.
Similarly, if the price of such inferior food rises, poor consumers will be forced to cut down the consumption of expensive food items like rice and wheat. And they will consume more of inferior food.
Thus, they will increase the demand for maize or jowar at the cost of wheat and rice.
Question : Differentiate ‘Giffen goods’ from ‘inferior goods’.
Answer:
# Giffen goods – Those goods whose demand increases with the increase in its price and vice versa.
# Inferior goods – Those goods whose demand decreases with the increase in the consumers income.
Comparison
|
SN |
Basis of Comparison |
Giffen Goods |
Inferior Goods |
|
1. |
Meaning |
Those goods whose demand increases with the increase in Prices. |
Those goods whose demand decreases with the increase in the consumer’s |
|
2. |
What is it ? |
Exception to the Law of Demand |
Determinant of the Demand |
|
3. |
Demand Curve |
Positive /Upward Sloping |
Negative / Downward sloping |
|
4. |
Price Effect |
Negative |
Positive |
2. Articles of snob appeal :
The law of Demand does not apply to the commodities which serve as status symbol, a source of display of wealth and richness.
These goods are also called the goods of conspicuous consumption.
These goods are demanded because they give the enjoyment to their possessor due to the feeling that other people envy him for possessing these expensive goods.
These goods of status symbol remain exclusive as long as their prices remain high.
Example : Diamond. Diamonds are the status symbol for rich women. Higher the price of diamond, their prestige value will also be higher.
The quantity of diamonds demanded is increased at higher price.
also read –
3. Emergencies :
The law of Demand may not hold good at emergencies like war, famines, pandemics etc.
The consumer expect shortage of goods and buy and hoard goods even at higher price during such situation.
4. Quality – Price Relationship / Veblen Effect:
Sometimes consumers assume that high priced goods are of higher quality than the low priced goods.
They take price as an index of quality.
Thus, high priced goods are demanded more than their lower priced substitute.
In this case law of demand does not hold good.
Example : ‘ Lux Supreme’ is demanded more than ‘Lux’ even both the soap belong to same company and brand.
This is called Veblen Effect.
5. Expectations about future Price:
If price of a commodity is rising today and it is likely to rise more in the future, people will buy more even at the existing higher price and store it.
Similarly, if the price of a commodity falls, people will postpone their purchase even at lower price today to purchase the commodity at a still lower price in future.