Law of demand expressing the inverse relationship between price and quantity demanded of a commodity is generally valid in most of the situations. But, there are. Some situations under which there may be direct relationship between price and quantity demanded of a commodity. These are known as exceptions to the law of demand.
One of the exceptions is associated with name of Thorstein Veblen (1857-1929). He was a social critic and propounded the doctrine of conspicuous consumption. According to him, if consumers measure the desirability or the utility of a commodity solely by its price and nothing else, they tend to buy more of the commodity at a higher price and less of it at a lower price;
In this case, the relationship between price and quantity demanded of the commodity becomes direct, leading to an exception to the law of demand. Diamonds are often cited as an example. Commodities like diamond, precious stones, antique sculptures, original manuscripts, rare paintings, etc., have a status or prestige value (rather than intrinsic value) for the rich section of the society.
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In this type of situation, prestige is directly associated with the price of the good. Higher the price of the good, greater will be the status or prestige of the buyer in the society and vice-versa. Such Veblen goods (after the name of the propounder) lose their snob appeal or ostentation function, when the price falls.
That is why rich people buy more of it at a higher price and less of it at a lower price. Therefore, the law of demand does not apply in case of commodities which are used as status symbols.
Bandwagon effect is another exception to the law of demand, which is a sort of demonstration effect. Shown by a section of the society which imitates the consumption pattern of higher income groups, popular film stars or some charashimatic personality. Here, people may start demanding more of a community even of higher price violating the law of demand.
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Another exception to the law of demand is associated with the name of Robert Giffen (1837-1910). Early in the nineteenth century, he observed rise in the demand for bread by low paid British workers with the increase in its price. Bread was the staple food for the British workers.
When the price of bread rose, they were compelled to spend more on the same quantity of bread. With little money income left with them, they could not afford to buy as much meat as before. To maintain their total intake of good, they substituted bread (still being cheaper food) for meat even at a higher price of it.
Thus, a direct relationship is established between price and quantity. After the name of Robert Giffen, these goods for which there is a direct price-demand relationship are called Giffen goods. Such basic food items (like potato, bajra, barley, gram, etc.) consumed by poor families are some other examples of Giffen goods on which large part of the total income is spent by the consumers, i.e., it must have strong income effect. In the case of Giffen good, demand curve slopes upward and the law of demand does not operate.
The law of demand does not hold in times of emergency like flood, drought, famine or war, as households do not behave in normal way in such periods. Fear of shortage of goods in future in such periods increases their present demand, although the prices are rising.
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Further, an ignorant buyer may buy more of a commodity, when its price in fact goes up. He may also be haunted by the phobia that higher priced commodity is better in quality and vice-versa.
There are some other exceptions to the law of demand, which are only apparent and not real. One of these is related to the people expectations about future prices. If people expect the price of a good, say, share to rise in the future, they become panicky and demand more of it even at a higher price. And if they expect the price to fall in the future, they demand less of it even at a lower price.
Thus, more quantity of the good is demanded at rising prices and less quantity of goods is demanded at falling prices. This seems contrary to the law of demand. But, in this case, the law of demand still holds.
The change in demand for the good is not due to the change in the prices, but, because of a shift in the demand curve, rightward or leftward as the case may be. Moreover, the law of demand assumes away future expectations.
Over the course of business cycle, it is found that during period of prosperity larger amounts of goods are purchased at higher prices and during depression periods of business cycle, smaller quantities are purchased at lower prices. If properly interpreted, this is also not an exception to the law of demand.
This only shows that demand for many goods increases during prosperity because of increase in the income of people and not because of increase in prices of goods. Similarly, during depression period, demand for goods decreases because of the decline in the income of the people and not because of the decrease in the prices of goods. Thus, it does not contradict law of demand.
Another apparent exception to the law of demand is found when a commodity is sold under different brand names at different prices. Almost identical ‘Lux’ and ‘Supreme Lux’ are sold at different prices.
Higher priced ‘Supreme Lux’ is sold more than the lower priced ‘Lux’, even though both are almost the same. But, this is also not a real exception to the law of demand. This is so because those who buy higher priced brand think that the two brands are different. Hence, two brands should be analysed as different commodities in this situation.
Notwithstanding these exceptions, the universal applicability of the law of demand is undoubted. Even the demand for Giffen goods is to be considered from existence point of view. Bread is bare necessity for existence.
The wage earners purchase the same or more amount of bread despite the price rise as it is cheap and people are habituated to consume. Further, the demand for luxurious goods is considered from social point of view and not from economic consideration.