Exceptions to the Law of Demand

The Law of Demand describes the usual relationship between price and quantity demanded, but a small number of well-recognised cases run counter to it — situations where the demand curve slopes upward instead of downward, at least over some range of prices. The Maharashtra HSC (MSBSHSE) Economics syllabus identifies the following exceptions:

1. Giffen Goods. Named after the nineteenth-century British statistician Sir Robert Giffen, a Giffen good is a special kind of strongly inferior good — typically a staple food item forming a very large share of a very poor household's budget. When the price of such a staple rises, a very poor household's real income falls so sharply that it can no longer afford even the small quantity of superior food it was previously buying alongside the staple. To keep its total food intake adequate, the household is forced to buy more, not less, of the now-costlier staple, cutting further into its purchases of the superior food instead. Here the negative income effect of the price rise is so strong that it outweighs the normal substitution effect, and demand for the staple actually rises as its price rises — a genuine violation of the Law of Demand, not just a low responsiveness to price.

2. Veblen Goods (Prestige or Snob Goods). Named after the economist Thorstein Veblen and his idea of conspicuous consumption, a Veblen good is one bought partly because it is expensive — its high price itself signals status, exclusivity or wealth. Diamonds, luxury cars and premium branded goods are the standard examples. If the price of such a good falls, demand can actually fall too, because the good loses some of its prestige value; conversely, a price rise can raise demand, as the good becomes an even stronger status symbol. This is a deliberate violation of the assumption, built into the Law of Demand, that a commodity carries no prestige value.

3. Expectations of Future Price Changes. If consumers expect the price of a commodity to rise further very soon, they may buy more of it right now even at today's already-higher price, in order to avoid paying a still-higher price later — demand rises together with a rising price. Symmetrically, if buyers expect a further price fall, they may postpone purchases even at today's lower price, waiting for it to fall further — this is exactly why the Law of Demand explicitly assumes unchanged price expectations. …