Recently updated on April 13th, 2023 at 06:02 pm
In a competitive market, the price conditions of a product or service will keep varying until the demand equals the supply thereby creating an equilibrium.
Law of demand states that all conditions being equal, as the price of a product increases, the demand for that product will decrease. Consequently, as the price of a product decreases, the demand for that product will increase.
The change in income of a consumer or a family also determines the Demand for a particular product. If a family’s income increases, they may choose to buy a specific product in more quantity, no matter the Price. Again, if the family’s income decreases, they can select to reduce product consumption to an extent. It opposes the law of Demand.
A significant exception to the law is Demand for luxury goods. In such cases, even if the price increases, the consumer won’t stop consumption. Cigarettes and alcohol typically come in this category.
The Demand for essential goods stays intact even if there’s a price rise. People can’t stop purchasing the products of regular necessities. For example, if the cost of salt increases, consumers won’t end affording it. It is a complete opposite to the law of Demand in economics.
Price Change Exception
The issue of price change in the market is another exception to the law of Demand. There might be a situation when the Price of a product or service increases and is subjected to future growth. So, the customers may buy more of it to avoid further cost increment. Eventually, there are times when the Price of a product is about to decrease. Consumers may temporarily stop the purchase to avail of the future benefits of price decrement.
Recently, there has been a massive rise in the price of onions. People were buying it more due to the worry of the further cost increase.
Giffen Goods is a concept that was introduced by Sir Robert Giffen. These goods are goods that are inferior in comparison to luxury goods. However, the unique characteristic of Giffen goods is that as its price increases, the demand also increases. And this feature is what makes it an exception to the law of demand.
The Irish Potato Famine is a classic example of the Giffen goods concept. Potato is a staple in the Irish diet. During the potato famine, when the price of potatoes increased, people spent less on luxury foods such as meat and bought more potatoes to stick to their diet. So as the price of potatoes increased, so did the demand, which is a complete reversal of the law of demand.
The theory of Veblen goods belongs to the next category of exceptions to the law of Demand. Thorstein Veblen was the one to highlight this concept. Veblen goods are the ones whose demand increases with their Price. They become more valuable with their price rise. These are the goods people consider to be more useful with an increase in Price. Like a high priced gold necklace, it’s more desirable to the customer than the one with lower costs. A cell phone model with high cost has more demand in the market. These insights indicate exceptions to the law of Demand with examples.
Veblen’s concept suits the best in the case of most popular celebrities. Like, they go for a high range of cosmetics or jewellery to maintain their status. It is a total exception to the law of Demand.
The second exception to the law of demand is the concept of Veblen goods. Veblen Goods is a concept that is named after the economist Thorstein Veblen, who introduced the theory of “conspicuous consumption”. According to Veblen, there are certain goods that become more valuable as their price increases. If a product is expensive, then its value and utility are perceived to be more, and hence the demand for that product increases.
And this happens mostly with precious metals and stones such as gold and diamonds and luxury cars such as Rolls-Royce. As the price of these goods increases, their demand also increases because these products then become a status symbol.