Are there any exceptions to the law of demand?

Answer 1

Law of demand says that when the price of a good or service rise , demand for that good or service falls and when price of a good or service falls its demand rises.its mean there is inversely or negative relation between price and demand. exceptions:1. Test and fashion of consumer will not change.2. Income of the consumer will not change.3.prices of other substitutes of that good or service will not change.3, there will no discovery of substitutes of that good or service

Exceptions to the law of demand

Does the demand for a product always vary inversely with the price? There are two possible reasons why more might be demanded even when the price of a good or service is increasing. We consider these briefly - ostentatious consumption and the effects of speculative demand.

(a) Ostentatious consumption

Some goods are luxurious items where satisfaction comes from knowing both the price of the good and being able to flaunt consumption of it to other people! The demand for the product is a direct function of its price.

A higher price may also be regarded as a reflection of product quality and some consumers are prepared to pay this for the"snob value effect".

Examples might include perfumes, designer clothes, and top of the range cars. Consider the case of VI which is considered to be the most exclusive perfume in the world. Only 475 bottles have been produced and bottles have been selling for £47,500 each - a classic case of paying through the nose for an exclusive good.

Goods of ostentatious consumption are known as Veblen Goods and they have a high-income elasticity of demand.That is, demand rises more than proportionately to an increase in income.

(b) Speculative Demand

The demand for a product can also be affected by speculative demand. Here, potential buyers are interested not just in the satisfaction they may get from consuming the product, but also the potential rise in market price leading to a capital gain or profit. When prices are rising, speculative demand may grow, adding to the upward pressure on prices. The speculative demand for housing and for shares might come into this category and we have also seen, in the last few years, strong speculative demand for many of the world's essential commodities.

Speculation drives the prices of commodities to fresh highs

World commodity prices have reached new highs this year helped by an increase in the rate of economic growth in the global economy. Among the metals that have achieved record price levels are copper, zinc, gold and platinum; prompting sceptics to question how much longer prices can continue rising. Many market experts believe that the demand for commodities has been spurred by heavy speculator activity. For example, pension funds and hedge funds have been investing in commodity mutual funds over recent years leading to increased demand for precious metals. Prices have risen quickly because commodity producers are unable to raise output sufficiently to meet unexpectedly strong demand.

Source: Adapted from news reports, July 2006

The non-linear demand curve and the idea of price points

So far in our introductory theory of demand, we have drawn the demand curve for a product to be linear (a straight line). In many real world markets this assumption of a linear relationship between price and quantity demanded is not realistic. Many price-demand relationships are non-linear and an example of this is provided in the chart above, used to illustrate the idea of price-points.

Price points are points on the demand curve where demand is relatively high, but where a small change in price may cause a sizeable contraction in demand leading to a loss of total revenue for the producer.

Price points can be justified in a number of ways:

• A price rise at the price point may make the product more expensive than a close substitute causing consumers to change their preferences
• Customers may have become used to paying a certain price for a type of product and if they see a further price rise, this may cause them to revalue how much satisfaction they get from buying and consuming something, leading to a decline in demand
• There may be psychological effects at work, supermarkets for example know the importance of avoiding price points - £2.99 somehow seems cheaper than £3.00 despite the tiny price difference

For AS level economics, you will be expected to draw and use linear demand curves in your basic analysis. But it is important to realise that in the real world of business, price-demand relationships can be complex and often a business does not have enough information about the behaviour of consumers for them to actually construct an accurate demand curve. As with many aspects of economic theory, we are constructing curves to illustrate economic relationships. They are simplifications of reality. BY Nilabh Jha

email:-nilabh_jha143@Yahoo.com

Answer 2

In theory, yes. They are called "Giffen goods" The Law of Demand is actually a simplification of what happens to quantity demanded when price changes. There are actually two effects occuring. Assuming the prices of all other goods do not change, as the price of a particular good increases, consumers tend to substitute other goods for that good. This is called the substitution effect. However, as the price of a particular good increases, consumers have less overall purchasing power, and therefore, normally, consume less of all goods. This is the income effect, and it is usually negative (quantity demanded decrease as price increases). However, certain types of goods, called "inferior goods", have a positive income effect, meaning that, at least for the income effect part of the price change, quantity demanded increases as price increases. Or, as is more easily demonstrated, quantity demanded decreases as price decreases. An "inferior good", in economics, is a very inexpensive product that meets an absolute need, as cheaply as possible, in a consumer's life. Think of Ramen noodles. They cost about 20 cents per pack, and one pack can feed an adult. In fact, I don't think there's a cheaper way to get a meal than Ramen Noodles. When you don't have any money, that's what you eat to keep your stomach full. But. If you have money, you can do a lot better, both in terms of taste and healthiness, than Ramen Noodles. Most people who eat Ramen Noodles stop eating them when they get a job. Because then they have the income to purchase those better products. Similarly, when someone gets fired or laid off, they will start consuming more Ramen Noodles, because that's all they can afford now. For most of the paragraph above, we talked about changes in nominal income (i.e., the dollar value of your paycheck) and its effect on demand. This is not really a change in quantity demanded, but a shift of the entire demand curve. But, in the context of the Law of Demand, we have to remain on the same demand curve. So let's get back to the "income effect" of a change in price along a demand curve. When we're talking about "inferior goods" like Ramen Noodles, even if your income doesn't change, a change in the price of Ramen Noodles will change your real income (i.e., the total utility you can obtain given your unchanged budget). As the price of Ramen Noodles increases, you have less real income and can obtain less utility, even though your nominal income has not changed. This income effect, for the change in price of an inferior good like Ramen Noodles, is unquestionably positive, meaning it tends to make you purchase more (not less) of the product as its price increases. However, the income effect is only part of what's going on. There's also the substitution effect, which I already talked about briefly. And the substitution effect is always negative. And, even for inferior goods, the substitution effect is usually larger than the income effect. And so, for most goods, even most inferior goods, once you consider both the income effect and the substitution effect, the net change in quantity demanded is still in the opposite direction of the change in price, which is constistent with the Law of Demand. However, in some very rare cases, the income effect of a price change of an inferior good can outweigh the substitution effect. In order for this to happen, first, the good in question must be an inferior good (otherwise the income effect will not be negative). But that's not enough. The good must also make up a substantial percentage of the consumer's purchases (otherwise, the change in "real income" will be negligible, and therefore the income effect will be negligible). But also, there must be a lack of close substitutes for the good in question (otherwise the subsitution effect will be large enough to outweigh the income effect). This last condition is where most inferior goods fail to obtain Giffen good status. Let's go back to the Ramen Noodle example. Are there close substitutes for Ramen Noodles? Sure there are. My grocery store carries at least two different brands of Ramen Noodles, and they are very close substitutes for each other. But, even if you consider "Ramen Noodles" to be all one good, with no distinction between brands, there are still fairly close substitutes. Like Macaroni and Cheese. The Kraft brand is about 50 cents per box, but most stores have their own brands that can be as cheap as 25 cents per box, definitely in the same price range as Ramen Noodles. For that matter, if you're willing to put a little more time and effort into it, rice, potatoes, and pastas are even cheaper than Ramen Noodles. So, yes, there are plenty of alternatives to Ramen Noodles. So the companies that make them can't raise prices too much, or they'll lose their customers. Nevertheless, it is possible to imagine a situation where Giffen goods can exist. It can't happen here, in the developed world, because we have a such a wide variety of products available at so many retail stores. But put yourself in a third world country that doesn't have Walmart Super Centers. People there don't have a lot of income, and they have to spend most of it on food. In fact, their income is so limited, they have to spend most of their food dollars on one specific product, and that product, more often than not, is Rice. Now, not everyone is dirt poor. Most people have enough money to buy a chicken every once in a while. But even for the people that are donig okay on money, rice is still the most cost-effective product for combatting hunger, and unless they're rolling in money, everyone is going to be eating an awful lot of rice. And these countries don't have Ramen Noodles or Macaroni and Cheese that consumers can go buy at the local grocery store. They don't even have potatoes, at least not for anywhere near as cheap as rice, because potatoes are not grown in this country (though, in some other country, where potatoes are grown but rice is not, potatoes could very easily be the Giffen good). So what happens in this country when the price of rice increases? The number of calories required to sustain the human body doesn't change. You still need X calories to keep from starving to death. Only now, the main food in your diet, the one that provides the vast majority of calories in your diet, just increased in price. Are you going to keep purchasing the same amounts of rice and chicken? No, because you can't do that anymore, given the new, higher price of rice, and the resulting lower real income. Are you going to buy more chicken? No, because, even at the higher price, rice is still a heck of a lot cheaper, in terms of calories per dollar, than chicken. Are you going to buy less rice? No, because you still need X calories per day, and you're not increasing your chicken purchases. In fact, to maintain you X calories per day, you're going to have to purchase fewer chickens so you can spend more money on rice. But purchasing the same amount of rice as you always purchased isn't enough, because now you have to replace some portion of the chicken calories in your diet. So you'll have to keep on replacing chicken with rice until your total calories reaches X. And so, you end up buying more rice when the price of rice increases. Alternatively, let's say the price of rice goes down. Now you have more real income. Are you going to purchase more rice? Heck no! Why would you purchase more rice when you can now afford more chicken, or perhaps even some of that new product you saw in the market last week - beef, you think they called it. Looks yummy, but man, it was expensive. Maybe you can afford a little bit of that now. Perhaps, at first, you wouldn't decrease your purchases of rice. Instead, you would keep purchasing the same amount of rice, but more chicken, and more beef, and - what are those green things that guy in the market is selling? Vegetables? Yeah, you'll have some of those too - and increase your total calorie intake. But you can only consume so many calories in a day without exploding. And eventually, you'll start cutting back on rice. Especially when you experience the wonderful tastes of all these new products you can afford now, and realize how sick and fricking tired you are of that #%&*$ rice. And for the first time in your life, you find yourself saying, "But honey, we had rice LAST NIGHT! Lets have something different tonight." And your quantity demanded of rice decreases, even though the price decreased.

Answer 3

yes there are expectations in law of demand BANDWAGON EFFECTS : Desire to purchase those goods to follow stylish way of life which their friends and relatives are following,in this way the demand of a certain thing will be effected either it will increase or decrease SNOB EFFECTS : the consumers have desire that they should not use the goods which are used by ordinary persons so that they could differentiate themselves from others VEBLEN EFFECTS:The consumers who are prestige minded and purchase those goods which have the effect of increasing their dignity and show with high price so those people will buy only extraordinary and branded things that have its effects on law of demand

Answer 4

• there should not any war situation
• the price of other substitutes remains the same
• the population should not decrease
• there should not any change in the fashion or the like that

Answer 5

Giffen goods, Veblen goods, speculation, ignorance about the quality of goods etc leads to the exceptions of Law of Demand.

Answer 6

When referring to non-renewable resources like Coal and Oil.