Explain various exceptions to the law of demand?

Answer 1

Exceptions to law of demand states that with a fall in prices, demand also falls and with a rise price demand also rises. This can be represented by rising demand curve. In other words, the demand curve slopes upwards from left to right. It is known as an exceptional demand curve or unusual demand curve.

Some examples that favour the unusual demand curve are as follows:

- Giffen`s paradox: a paradox is an inconsistency of contrary. Sir Robert Giffen, an Irish Economist, with the help of his own example disproved their law of demand. The Giffen's paradox holds that "Demand is strengthened with a rise in price or weakened with a fall in price". He gave the example of Ireland who were using potatoes and meat as daily food articles. When price of potatoes declined, customers instead of buying larger quantities of potatoes started buying more of meat (superior goods). Thus the demand for potatoes declined in spite of fall in its price.

- Veblen's effect : Thorstein Veblen, a noted American economist contends that there are certain commodities which are purchased by rich people not for their direct satisfaction, but for their 'snob-appeal'. Veblen's effect states that demand for status symbol goods would go up with a rise in price and vice -versa. In case of such status symbol commodities, it is not the price which is important but the prestige conferred by that commodity on a person makes him to go for it. More commonly cited examples of such goods are diamonds and precious stones, world famous paintings, commodities used by world famous personalities, etc. Therefore commodities having 'snob -appeal are to be considered as exceptions to the law of demand.

- Fear of shortage : When serious shortages are anticipated by the people (e.g. during the war period) they purchase more goods at present even though the current price is higher.

- Fear of future rise in price : If people expect future hike in prices, they buy more even though they feel that current price are higher. Otherwise, they have to pay a still high price for the same product.

- Speculation: Speculation implies purchase or sale of an asset with the hope that its price may rise or fall and make speculative profit. Normally, speculation is witnessed in the stock exchange market. People n=buy more shares only when their prices show a rising trend. This is because they get more profit, if they sell their shares when the prices actually rise. Thus, Speculation becomes an exception to the law of demand.

- Conspicuous consumption: Conspicuous consumption refers to consumers 'purchase of some items though the item' prices are rising on account of their special uses in the modern style of life.

In case of articles like wrist watches, scooters, motorcycles, tape recorders, mobile phone etc., customer by more in spite of their high price.

- Emergencies: During emergency period like war, famine, floods, cyclone, accidents, etc. people buy certain articles even though the price are quite high.

- Ignorance: Sometime people may not be aware of the prices prevailing in the market. Hence, they buy more at higher price because of sheer ignorance.

- Necessaries: Necessaries are those items which are purchased by consumers whatever may be the price. Consumers would buy more necessaries in spite of their higher prices.