A Complete Guide for Exceptions of Law of Demand with Examples
In our study of Economics, we have studied the concept of 'Demand.’ (Students are advised to study the chapter demand before proceeding with this content) As demand discusses the natural phenomenon of the price and demand of goods and services, that the demand of a certain item will rise with the fall in price and vice versa, you must know that this phenomenon is actually not true for all kinds of goods and services.
In this context, the study of the exceptions to the law of demand becomes a requisite. We will understand the core of its exception in this content.
Exception of Law of Demand with Diagram
In an economy, the main factors that influence market conditions are demand and supply. In competitive markets, the price of a product keeps changing until demand and supply are balanced. This balance is known as equilibrium. However, there are some exceptions to the law of demand, which we will look at now. The law of demand generally holds true, but there are some important exceptions. For example, even if the price of cigarettes increases, the demand for them may not decrease. These exceptions mainly apply to Giffen goods, Veblen goods, and essential goods. Let's explore these exceptions in more detail.
Law of Demand and Its Exceptions
In an economy, the chief determinants of the market conditions are demand and supply factors. In competitive markets, the price range of the product keeps fluctuating as long as Demand and supply aren't equal. This situation is equilibrium. There are specific exceptions to the law of Demand that we will explore now. In Economics, the law of Demand is true to the lines for most cases. However, some significant exceptions are there. For instance, even if the Price for Cigarettes goes up, its Demand won't decrease. The exceptions to the law of demand typically suit the Giffen commodities, Veblen, and essential goods. Let us have a look at these exceptions in detail now.
Law of Demand
The Law of Demand states that when the price of a product increases, its demand decreases and vice versa, keeping all other factors constant. Say a buyer may get a dozen fruits at Rs.80. If the price hikes up to Rs.90, he can limit the purchase to half a dozen. Therefore, the law of Demand in Economics pictures an inverse relationship between the Price and quantity of a particular product or service. Now, we will get into what are the exceptions to the law of Demand?
Exceptions to the Law of Demand
Mainly, there are four exceptions of laws of Demand namely:
Giffen Goods
Veblen Goods
Necessities
Expectations of Future Price Changes
1. Giffen Good: The exception to the Law of Demand occurs in the case of Giffen goods, where an increase in price leads to an increase in quantity demanded, contrary to the general law. Giffen goods are typically inferior goods that make up a significant portion of a consumer's budget, such as staple foods like bread, rice, or potatoes in low-income households. When the price of a Giffen good rises, consumers cannot afford more expensive substitutes and are forced to allocate more of their limited budget to the Giffen good despite its higher price. This paradoxical behaviour is driven by the strong income effect (the reduction in real purchasing power due to higher prices) outweighing the substitution effect (the tendency to buy cheaper alternatives). As a result, the demand curve for Giffen goods slopes upward, defying the typical downward-sloping demand curve. This phenomenon is rare and occurs only under specific economic and social conditions.
2. Veblen Goods: Veblen goods are a special case where demand increases when the price goes up. This idea was introduced by Thorstein Veblen. People see these goods as more valuable when their prices rise. For example, a high-priced gold necklace becomes more attractive to buyers compared to a cheaper one. Similarly, a more expensive cell phone model may have higher demand. This goes against the usual rule in economics where demand usually decreases when prices rise. Celebrities, for example, may choose expensive cosmetics or jewellery to maintain their social status, which is another example of Veblen goods.
3. Necessary Goods: Necessary goods are items people need every day, and their demand doesn’t drop even if prices go up. People can’t stop buying these goods, no matter the price. For instance, if the price of salt increases, people will still buy it because they need it regularly. This situation breaks the usual rule that says demand falls when prices rise.
4. Expectations of Future Price Changes: Sometimes, the demand for a product changes because people expect its price to change in the future. If prices are going to rise, people might buy more of that product now to avoid paying more later. On the other hand, if they expect prices to drop, they might wait and not buy the product right away. For example, when onion prices rose sharply, people bought more because they feared prices would continue to increase.
Luxury Goods
Luxury goods are another exception to the usual rule. Even if the price of luxury items like cigarettes or alcohol increases, people still buy them. This is because these goods are seen as special, and their high price doesn’t stop demand.
Income Change
When a person’s or family’s income changes, it can affect the demand for goods. If income goes up, people may buy more of certain products, regardless of their price. But if income goes down, they may reduce their spending on certain items. This situation also contradicts the usual law of demand.
Solved Example
Q. Which Among the Following is a Necessary Good?
Salt
Gold
Car
Mobile
Ans: The right answer is salt. Salt is a regular use commodity in households. Even if the price increases, the demand for salt won't degrade. This theory comes as the exact opposite of the law of Demand. For all the necessary goods, the demand stays the same, even in the price increment. Exceptions to the law of demand examples include both essential and luxury items.
Q. Which of the following goods is least likely to be a Giffen Good?
A) Staple food in a low-income region
B) Luxury jewelry
C) Basic grains
D) Potatoes in historical famine situations
Ans: B) Luxury jewelry
Explanation:
Giffen Goods are typically stapled goods that constitute a large portion of the budget of low-income consumers, such as basic grains or staple foods like potatoes. Luxury jewelry, on the other hand, is not a staple good and is generally considered a Veblen Good, where higher prices may actually increase demand due to their status symbol appeal. Therefore, luxury jewelry is least likely to be a Giffen Good.
Q. Which factor does not contribute to a good being an exception to the Law of Demand?
A) Lack of substitutes
B) High necessity
C) High proportion of income spent on the good
D) Time period for adjustment
Ans: C) High proportion of income spent on the good
Explanation: While a high proportion of income spent on a good can make its demand more elastic (as consumers are more sensitive to price changes), it does not inherently make it an exception to the Law of Demand. Exceptions to the Law of Demand are typically driven by factors like lack of substitutes, high necessity (inelastic demand), or specific characteristics like being a Giffen or Veblen good. The time period for adjustment affects elasticity but does not directly create an exception.
Q. Which of the following scenarios is an example of speculative demand acting as an exception to the Law of Demand?
A) Rising prices of art pieces increase their desirability among collectors.
B) Investors buy real estate expecting prices to rise, thus increasing current demand despite higher prices.
C) A sudden increase in the price of electricity leads consumers to reduce usage.
D) Consumers continue to buy necessary groceries even as prices rise.
Ans: B) Investors buy real estate expecting prices to rise, thus increasing current demand despite higher prices.
Explanation:
Speculative Demand occurs when consumers purchase goods not for immediate use but with the expectation that their prices will continue to rise, allowing them to sell at a profit later. In this scenario, investors buy real estate anticipating future price increases, which boosts current demand even as prices rise, thereby acting as an exception to the Law of Demand.
Q. Which of the following is not an exception to the Law of Demand?
A) Addictive Goods
B) Necessities
C) Luxury Goods
D) Substitutes Availability
Ans: D) Substitutes Availability
Explanation: Substitutes Availability actually reinforces the Law of Demand rather than serving as an exception. When close substitutes are available, the demand for a good becomes more elastic, meaning consumers are more likely to switch to substitutes if the price rises, thereby adhering to the Law of Demand. The other options—Addictive Goods, Necessities, and Luxury Goods (like Veblen goods)—are all exceptions where the demand may not decrease with a price increase.
Conclusion
The exceptions to the Law of Demand reveal that consumer behaviour is influenced by various economic, social, and psychological factors. Situations involving Giffen goods, Veblen goods, speculative demand, necessities, or ignorance demonstrate deviations from the usual price-demand relationship. These exceptions highlight that the Law of Demand, though widely applicable, is not absolute. By understanding these anomalies, businesses and policymakers can make more informed decisions in complex market scenarios. Studying these exceptions deepens our grasp of economic principles and their practical applications in real-world markets.
FAQs on Exception of Law of Demand: Explanation with Examples
1. Where is the Law of Demand Not Applicable?
The law of Demand signifies that all other factors are proportional, the Price and Demand for a commodity share an inverse relationship. With the increase in the price of a particular good or service, its demand decreases, and vice versa. There are certain exceptions to the law of Demand for specific products. Examples are Giffen goods, Veblen goods, income change of the family, luxury items; all these concepts do not follow the law of Demand. Say, in the case of necessary items, the Demand stays the same even if the price increases. For goods such as jewelry or cars, the demand increases with a rise in Price. The latter is known as the Veblen concept.
2. What are Giffen Goods?
While discussing what are the exceptions to the law of Demand, Giffen goods are the first factor to consider. Sir Robert Giffen is the pioneer in introducing Giffen goods in Economics. These products are inferior to that regular or luxury purchases. As the Price of Giffen goods increases, so is their Demand. This significant feature makes these goods unique. Notably, all Giffen goods are inferior goods, but all inferior products aren't Giffen. Suppose there is a rise in the price range of meat or fish. To continue its daily consumption, the family may cut down the costs and thrive on bread.
3. What is the exception of law of demand?
The exception of law of demand refers to situations where the law of demand does not hold true. Typically, when prices rise, demand falls. However, in certain cases, people may buy more of a good even if the price increases.
4. What are the exceptions of law of demand with examples?
Here are some exceptions of law of demand with examples:
Giffen Goods: These are essential items for which demand increases as price rises. For example, a rise in the price of a staple food like bread might lead poorer households to buy more of it because they can’t afford better alternatives.
Luxury Goods: High-priced items like diamonds are often purchased for their prestige. People may buy more as the price increases to show wealth.
Speculative Goods: If people expect prices to increase further, they may buy more, even if prices are already high.
Necessities: Essential goods like medicines may be purchased regardless of their price.
5. Can you explain the exception of law of demand with a diagram?
To explain the exception of law of demand with diagram, imagine a graph where the X-axis represents quantity demanded, and the Y-axis represents price. Instead of a downward-sloping demand curve (as per the law of demand), the exceptions create an upward-sloping demand curve, showing that demand increases as price rises, as seen in Giffen goods.
6. What are the 4 exception law of demand?
The 4 exception law of demand includes:
Giffen goods.
Luxury goods.
Speculative goods.
Necessities.
7. What is the exception of the law of demand Giffen goods?
The exception of the law of demand Giffen goods occurs when people buy more of an inferior good as its price rises. For example, if the price of rice increases in a poor region, families might purchase more rice and cut down on costlier alternatives like vegetables.
8. What are the 5 exceptions to the law of demand?
Here are the 5 exceptions to the law of demand:
Giffen goods.
Luxury goods.
Speculative goods.
Necessities.
Future expectations of price increases.
9. Can you give an exception of the law of demand example?
An exception of the law of demand example is Giffen goods. For instance, in some low-income areas, when the price of bread rises, families may buy more bread because they can’t afford other foods.
10. What is an exception of the law of demand example in real life?
A real-life exception of the law of demand example is luxury goods like high-end watches or designer handbags. As their prices increase, demand might also rise because people associate higher prices with greater prestige and exclusivity. This behaviour is common in the luxury market.
