Meaning of the Law of Demand
The law of demand defines that with the change in price, there will be a change in the quantity demanded. An increase in price decreases the demand, and inversely when there is a drop in price, there will be an increase in the quantity demanded.
For example, the consumers who used to purchase 25 kgs of rice for rupees 1650 with an increase in price to 2000 rupees for 25 kgs the consumers may end up buying only 20 kgs of rice. In microeconomics, the law of demand has an inverse relationship between the price of a particular product or service and the quantity demanded of the same product or service.
Exceptions to the Law of Demand
In an economic environment, the central determinants of the economic situation are the supply and demand factors. In the cutthroat business sectors, the stability of the price of an item continues to vacillate insofar as demand and supply aren’t equal. The present circumstance is where the demand and supply are in balance or at equilibrium.
Below is the list as to why there are exceptions to the Law of Demand:
Giffen goods:
Giffen Goods was conceptualised and presented by Sir Robert Giffen. Godrej goods are products that are substandard or inferior goods when compared to luxury products. In any case, the remarkable feature of Giffen goods is that as the cost increases, the quantity demanded will also increase. Also, this component is the thing that makes it an exemption for the law of interest.
The Irish Potato Famine is an exemplary illustration of the Giffen goods. Although the potato famine in Ireland didn’t cut the consumption of potatoes, it increased in its consumption as potatoes are a staple in the Irish eating routine. During the famine, when the cost of potatoes had increased exceptionally from its regular price, individuals saved on extravagant food sources like meat and purchased more potatoes to adhere to their eating regimen. So as the cost of potatoes expanded, so did the demand, which is a complete inversion of the law of demand.
Veblen goods:
Thorstein Veblen, an economist, is the one who conceptualised and presented the Veblen goods in his Theory of “Conspicuous consumption”. As per Veblen, there are some products that become more significant and valuable as their price or cost increases. Assuming an item or a product or service is costly, then, at that point, its worth, value, and utility are seen to be more, and henceforth the demand for that product or service increases.
Also, this happens generally with luxury products and precious metals and stones, for example, gold, platinum, precious stones, diamonds, and extravagant vehicles like Porsche. As the cost of these merchandise expands, their demand also increases due to the fact that these items then, at that point, become a superficial point of interest and symbol of status.
Price change expectations:
There are times when the cost or price of an item, product, or service increases, and the economic situations are such that products or services might become more costly. In such cases, purchasers might purchase a greater amount of these items before the cost builds any further. Therefore, when there is a drop in price or value or expected to drop further, the end consumers may defer or postpone the buy to profit from the advantages of a lower cost.
For example, as of late, the cost of certain vegetables and fruits had expanded to a serious degree. Purchasers began purchasing and storing away more vegetables dreading further cost rise, which brought about expanded or increased demand.
There are additional times when shoppers might purchase and store essential products because of a fear of deficiency. In this manner, regardless of whether the cost of an item builds, its related demand may likewise increase as the item might be removed from the rack or it may stop existing in the market.
Essential or necessary products and services:
One more exception case for the law of demand is the essential or necessity goods and products. Individuals will keep on purchasing necessities, for example, medications or essential staples like salt, rice, and sugar, regardless of whether the cost increases. The costs of these items don’t influence the quantity demanded.
Change in income:
There will be a change in the behavioural purchase of goods and services according to the changes in personal income. Assuming that a family’s personal disposable income increases, they might buy more items independent of the rise in their cost, in this way increasing the quantity demanded of the item. Essentially, they may defer purchasing an item regardless of whether its cost lessens, assuming their personal disposable income has decreased. Henceforth, a change in an end consumer’s income may likewise be an exemption for the law of demand.
Luxury goods:
The consumption of luxury goods and services doesn’t cease even if the price of a certain product or service increases. For example, gold, real estate, etc.
Consumers negligence:
At certain times, the consumers are unaware of the price changes that take place in the market. At these times, the end consumers may end up paying more than the maker price.
Effect of demonstration:
Middle-income consumers tend to imitate or copy the upper-middle-class consumer behaviours and may tend to purchase the same products or services of the upper-middle class.
Changes in taste, preferences, and fashionable products:
Consumers’ changes in taste and preferences in fashionable products don’t change the quantity demanded with an increase in price rise as the consumers are willing to spend more on these products and services.
Trading in stock exchanges:
The law of demand won’t hold good in the speculation market. According to the law of demand, an increase in price will reduce the demand, but in the case of speculation and trading, people will buy more stocks even though there is an increase in the price of the stocks.
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