Exceptions to the Law of Demand

Theory of Demand - Exceptions to the Law of Demand

Exceptions to the Law of Demand:

The Law of demand is a common statement stating that prices and quantities of a commodity are inversely correlated. There are certain peculiar situations in which the law of demand will not hold well. In those situations, more will be demanded at higher price and less will be demanded at a lower price. The demand curves in those situations slope upwards exhibiting a positive relationship among price and quantity demanded as shown in figure below:

1846_exception of demnad law.jpg

Whenever the price rises from OP to OP1, amount demanded too increases from OQ to OQ1 and vice-versa. DD is an exceptional or abnormal demand curve. Below is the list of few exceptions to the law of demand.

(1) Veblen Effect:

Veblen has indicated that there are some goods demanded by very wealthy people for their social prestige. Whenever price of these goods increase, their use becomes more attractive and they are purchased in bigger amounts. Demand for diamonds from wealthier class will go up when there is raise in price. When such goods were cheaper, the rich would not even buy.

(2) Giffen Paradox:

Sir Robert Giffen introduced that the poor people will demand more of low-grade goods when their prices increase and demand less when their prices fall. Inferior goods are those goods that people purchase in large quantities when they are poor and in small quantities when they become rich. For illustration, poor people expend the major portion of their income on coarse grains and only a small portion on rice. Whenever the price of coarse grains increases, they will purchase less rice. To fill up the resultant gap, more of coarse grains have to be purchased. Therefore, raise in the price of coarse grains outcomes in the raise in quantity of coarse grains bought. This is termed as ‘Giffen Paradox’. In such situations, the law of demand has an exemption.

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