Exceptions to the Law of Demand
Exceptions to the Law of Demand
Exceptions to the Law of Demand refer to those circumstances and reasons in which this law does not apply. In other words, there are certain circumstances in which the demand for a commodity increases when its price increases and decreases when its price falls. In these circumstances, the demand curve shifts upwards to the right.
1. Giffen Paradox – Giffen good or inferior good is an exception to this law of demand. When the price of an inferior good falls, poor people will buy less of it and vice versa. For example – when the price of maize falls, poor people are ready to spend on good grains instead of maize. If the price of maize rises, the amount spent on it has to be increased otherwise they will have to face starvation. In this way, a fall in price leads to a fall in the quantity demanded and vice versa. This was first explained by Giffen and that is why it is known as Giffen Paradox.
2. Prestige goods – The law of demand does not apply to those goods which are used to increase social prestige or to display splendor and wealth. For example, gold, precious stones, rare paintings, antiques etc. Rich people buy such goods because their prices are high and when their prices increase, they buy more of them.
3. Expectations regarding future price changes – This law does not apply when there is an expectation or doubt about the price of a commodity changing in the near future. For example – if the price of a commodity increases and there is an expectation of further increase in it, then its demand increases instead of decreasing because consumers want to stock up as much of that commodity as possible. On the contrary, if the price of the commodity falls and there is an expectation of further fall in it, then its demand will decrease instead of increasing.
4. Ignorance of the consumer – Ignorance of the consumer is another factor which sometimes provokes many to buy more goods at high prices. Due to ignorance they think that an item of the same price is better than the one of lower price.
5. Change in fashion- Change in fashion and preference has a different effect on the product in the market. When high-heeled shoes are in demand in place of low-heeled shoes, then there is no point in reducing the price of low-heeled shoes to clear their stock because they are out of fashion.
6. Brand loyalty- If a consumer is loyal to a particular brand of a product, then he will not change the brand even if its price fluctuates. For example, Mr. X always wears Bata shoes, so he will not change the brand even if its price rises.
7. Necessities- The law of demand does not apply to essential goods. For example- Salt is an essential commodity and its demand will not change even if its price fluctuates because even if its price falls, the consumer cannot increase its consumption and cannot reduce its consumption if its price rises.
8. Fear of scarcity- During an emergency or war, people fear scarcity or shortage. Then to maintain the stock of that commodity for the future, the consumer buys more and more of it at a higher price.
It is clear from the above discussion that there are some exceptions to the law of demand. But this does not mean that this law is useless and ineffective. The fact is that all the exceptions to this law are based on assumptions only. The law of demand is universal and is an important law of economics.
