EXCEPTION OF THE LAW OF DEMAND

 Exceptions to the Law of Demand

According to the law of demand, other things being equal, more of a commodity will be demanded at lower prices than at higher prices,. The law of demand is valid in most cases; however there are certain cases where this law does not hold good. The following are the important exceptions to the law of demand.

(i) Conspicuous goods: Articles of prestige value or snob appeal or articles of conspicuous consumption are demanded only by the rich people and these articles become more attractive if their prices go up. Such articles will not conform to the usual law of demand. This was found out by Veblen in his doctrine of “Conspicuous Consumption” and hence this euect is called Veblen euect or prestige goods euect. Veblen euect takes place as some consumers measure the utility of a commodity by its price i.e., if the commodity is expensive they think that it has got more utility. As such, they buy less of this commodity at low price and more of it at high price. Diamonds are often given as an example of this case. Higher the price of diamonds, higher is the prestige value attached to them and hence higher is the demand for them.

(ii) Giuen goods: Sir Robert Giuen, a Scottish economist and statistician, was surprised to find out that as the price of bread increased, the British workers purchased more bread and not less of it. This was something against the law of demand. Why did this happen? The reason given for this is that when the price of bread went up, it caused such a large decline in the purchasing power of the poor people that they were forced to cut down the consumption of meat and other more expensive foods. Since bread, even when its price was higher than before, was still the cheapest food article, people consumed more of it and not less when its price went up.

Such goods which exhibit direct price-demand relationship are called ‘Giuen goods’. Generally those goods which are inferior, with no close substitutes easily available and which occupy a substantial place in consumer’s budget are called ‘Giuen goods’. All Giuen goods are inferior goods; but all inferior goods are not Giuen goods. Inferior goods ought to have a close substitute. Moreover, the concept of inferior goods is related to the income of the consumer i.e. the quantity demanded of an inferior good falls as income rises, price remaining constant as against the concept of giuen goods which is related to the price of the product itself. Examples of Giuen goods are coarse grains like bajra, low quality rice and wheat etc.

(iii) Conspicuous necessities: The demand for certain goods is auected by the demonstration euect of the consumption pattern of a social group to which an individual belongs. These goods, due to their constant usage, become necessities of life. For example, in spite of the fact that the prices of television sets, refrigerators, coolers, cooking gas etc. have been continuously rising, their demand does not show any tendency to fall.

(iv) Future expectations about prices: It has been observed that when the prices are rising, households expecting that the prices in the future will be still higher, tend to buy larger quantities of such commodities. For example, when there is wide-spread drought, people expect that prices of food grains would rise in future. They demand greater quantities of food grains as their price rise. However, it is to be noted that here it is not the law of demand which is invalidated but there is a change in one of the factors which was held constant while deriving the law of demand, namely change in the price expectations of the people.

(v) The law has been derived assuming consumers to be rational and knowledgeable about market- conditions. However, at times, consumers tend to be irrational and make impulsive purchases without any rational calculations about the price and usefulness of the product and in such contexts the law of demand fails.

(vi) Demand for necessaries: The law of demand does not apply much in the case of necessaries of life. Irrespective of price changes, people have to consume the minimum quantities of necessary commodities.

Similarly, in practice, a household may demand larger quantity of a commodity even at a higher price because it may be ignorant of the ruling price of the commodity. Under such circumstances, the law will not remain valid. For example Food, power, water, gas.

(vii) Speculative goods: In the speculative market, particularly in the market for stocks and shares, more will be demanded when the prices are rising and less will be demanded when prices decline.

The law of demand will also fail if there is any significant change in other factors on which demand of a commodity depends. If there is a change in income of the household, or in prices of the related commodities or in tastes and fashion etc., the inverse demand and price relation may not hold good. 

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