Q.State and explain the ‘law of demand’ with its exceptions.

The law of demand states an inverse relationship between the price of a good and its quantity demanded, other things being equal — as price falls demand rises, and as price rises demand falls. It is shown by a downward-sloping demand curve. Its exceptions include Giffen goods, prestige/Veblen goods, expectations of future price change, fear of shortage and ignorance.

Statement of the law: The law of demand states that, other things remaining constant (ceteris paribus), the quantity demanded of a commodity increases when its price falls and decreases when its price rises. Thus there is an inverse (negative) relationship between price and quantity demanded.

Assumptions: The law holds only if the following remain unchanged — income of the consumer, prices of related goods, tastes and preferences, and expectations about future prices.

Demand schedule (example):

The schedule shows that as price falls, quantity demanded rises.

Demand curve: When these points are plotted with price on the Y-axis and quantity on the X-axis, we get a demand curve that slopes downward from left to right, confirming the inverse relationship.

Reasons for the downward slope: the law of diminishing marginal utility, the income effect (a fall in price raises real income), the substitution effect (the good becomes cheaper relative to substitutes) and the arrival of new buyers when price falls.

Exceptions to the law of demand:

1. Giffen goods: For certain inferior goods (Giffen's paradox), a fall in price leads to a fall in quantity demanded because consumers shift to superior goods.
2. Prestige / Veblen goods: For goods bought for status (diamonds, luxury cars), higher prices attract more demand. …