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Question
There are no exceptions to the Law of Demand. Explain
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Solution
EXCEPTIONS TO THE LAW OF DEMAND: There are some important cases in which the demand for the commodity is greater when prices rises and smaller when price falls. Such cases are called exceptions to the law of Demand. The Exceptional Demand curve therefore slopes upwards from left to right and its has a positive slope. It indicates a direct functional relationship between Price and Demand.
Such exceptional cases are as follows:
(1) Giffen's Goods: Giffen's goods are inferior goods like cheap bread, coarse rice, vegetable ghee, etc. In 19th century Sir Robert Giffen in England noticed such exceptional behaviour in respect of Giffen's goods. When prices of such good fall demand declines and vice-versa. This is contrary to the law of demand.
So it is known as Giffen's Paradox.
According to Robert Giffen, when price of such goods fall the demand declines as it is substituted by superior goods due to a rise in real income of the consumer. Therefore, demand for superior goods increase, which means there is a fall in demand for inferior goods.
(2) Prestige Good/ Goods of Snob appeal:
Expensive goods such as diamonds, luxury cars are prestige goods. Rich people consumer such goods as status symbol. So they demand these good when the price rises.
(3) Price illusion of Consumers psychological bias:
Consumers have illusions that high prices goods are better quality. Therefore the demand for such goods then to increase with rise in their prices.
e.g. Branded goods like Nike, Adidas, Reebok which are expensive are demanded at a high price for their quality.
(4) Ignorance: Sometimes people do not have proper market knowledge, regarding the price change. So they may end up buying more goods even at a high price.
(5) Demonstration effect: The tendency of the low income group to imitate the consumption pattern of the high income group is known as "demonstration effect". Due to this demand for goods like smart phones, LED TV have increased.
(6) Speculation: Due to the speculation the demand for a commodity may rise or fall. People may tend to buy more at a rising price when they anticipate a future price rise. For example in the stock market people tend to buy more shares at rising prices.
(7) Habitual goods: Demand for certain goods like alcohol, cigarettes etc., will be high even at a high price due to habits of consumption.
Such exceptional cases are as follows:
(1) Giffen's Goods: Giffen's goods are inferior goods like cheap bread, coarse rice, vegetable ghee, etc. In 19th century Sir Robert Giffen in England noticed such exceptional behaviour in respect of Giffen's goods. When prices of such good fall demand declines and vice-versa. This is contrary to the law of demand.
So it is known as Giffen's Paradox.
According to Robert Giffen, when price of such goods fall the demand declines as it is substituted by superior goods due to a rise in real income of the consumer. Therefore, demand for superior goods increase, which means there is a fall in demand for inferior goods.
(2) Prestige Good/ Goods of Snob appeal:
Expensive goods such as diamonds, luxury cars are prestige goods. Rich people consumer such goods as status symbol. So they demand these good when the price rises.
(3) Price illusion of Consumers psychological bias:
Consumers have illusions that high prices goods are better quality. Therefore the demand for such goods then to increase with rise in their prices.
e.g. Branded goods like Nike, Adidas, Reebok which are expensive are demanded at a high price for their quality.
(4) Ignorance: Sometimes people do not have proper market knowledge, regarding the price change. So they may end up buying more goods even at a high price.
(5) Demonstration effect: The tendency of the low income group to imitate the consumption pattern of the high income group is known as "demonstration effect". Due to this demand for goods like smart phones, LED TV have increased.
(6) Speculation: Due to the speculation the demand for a commodity may rise or fall. People may tend to buy more at a rising price when they anticipate a future price rise. For example in the stock market people tend to buy more shares at rising prices.
(7) Habitual goods: Demand for certain goods like alcohol, cigarettes etc., will be high even at a high price due to habits of consumption.
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