Q.Explain the exceptions to the Law of Demand.
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Start your 14-day free trial to unlock the full solution →The Law of Demand states that, other things equal, demand falls when price rises and rises when price falls. But in a few cases demand moves the same way as price. These exceptions are Giffen goods, Veblen/prestige goods, price-expectation situations, consumer ignorance, and necessities.
The Law of Demand
The Law of Demand states that, other things remaining constant, there is an inverse relationship between the price of a commodity and its quantity demanded - demand expands when price falls and contracts when price rises. The demand curve therefore slopes downward from left to right.
Exceptions to the Law of Demand
In the following situations more is demanded even at a higher price, so the demand curve slopes upward:
- Giffen goods: named after Sir Robert Giffen. These are highly inferior goods (such as coarse grains). When their price rises, poorer consumers cannot afford superior substitutes, so they buy more of the cheap staple - demand rises with price.
- Goods of ostentation (Veblen / prestige goods): articles like diamonds, luxury cars and designer items are bought as a mark of status. A higher price increases their prestige value, so more is demanded.
- Expectation of future price change: if people expect prices to rise further in future, they buy more now even though the price has already risen (and buy less when they expect prices to fall).
- Ignorance effect: consumers sometimes judge quality by price and believe that a costlier good is of better quality, so they demand more of the dearer good. …
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