What is Law of Demand? Explain the exceptions to law of demand.

Ans.

The Law of Demand explains the relationship between the change in quantity demanded and change in price. It may be defined in Marshall’s words as “the amount demanded increases with a fall in price, and diminishes with a rise in price”. In other words, the law of demand says that the price and the quantity demanded are inversely related, all other things remaining equal.

In our daily life, it is normally observed that decrease in price of a commodity leads to increase in its demand. Such behavior of consumers has been formulated as ‘Law of Demand’.

The law of demand is based upon certain assumptions. These are as follows:

(1) The income of the customers remain constant;

(ii) There is no change in the tastes and preferences of the customers;

(iii) There is no change in the customs and traditions;

(iv) No new substitutes for the commodity;

(v) There should not be any changes in the price of other products,

(vi) Price rise in the future is not expected;

(vii) There should not be any change in the quality of the product;

(viii) The habits of the consumers should remain unchanged;

(ix) The product should not be conspicuous item. (items that shows status)

Exceptions to the Law of Demand

In certain cases, consumers buy more when the price of a commodity rises and less when price falls. The demand curve slopes from the left to right. The law of demand does not apply to the following cases:

1. Expectations of further price rise in future: When consumers expect a continuous rise in the price of a commodity, they buy more of it despite the increase in its price with a view to avoiding paying much higher price in future. For instance, in pre-budget months, prices generally tend to rise. Yet, people buy more storable goods in anticipation of further price rise in the future.

2. Conspicuous Goods (Status Goods): The law of demand does not apply to goods which are used as ‘status symbol’ or for improving social prestige or displaying wealth. E.g., diamond & gold jewellery, rare paintings, antiques etc. Rich people buy them more because their prices are high and tend to but more when their prices move upwards.

3. Giffen Goods: Another exception to the law of demand is the classic case of Giffen Goods. A Giffen good is considered to be an inferior good whose demand increases when its price increases. Sir Robert Giffen, an economist, was surprised to find out that as the price of bread increased, the British workers purchased more bread, which was the opposite of what law of demand says. Why did this happen? The reason given for this is that when the price of bread went up, it caused such a large decline in the purchasing power of the poor people that they were forced to cut down the consumption of meat and other more expensive items. Since, bread even when its price is higher than before was still the cheapest article available. people consumed more of it and not less when price went up.

Example: Suppose that the monthly minimum consumption of food grains by a poor household is 20 kg of bajra (an inferior good) and 10 kg of wheat (a superior good). Suppose that bajra sells at Rs. 5/- per kg and wheat at Rs. 10/- per kg and the household spends a total of Rs. 2000/- on these items. Now, if the price of bajra increases to Rs. 6/- per kg, the household will be forced to reduce the consumption of wheat by 5 kg and increase that of bajra by the same quantity in order to meet its minimum monthly consumption requirement of 30 kg of food grains, its total expenditure on food grains remaining the same.

4. Necessities of Life: Normally, the law of demand does not apply on necessities of life such as food, cloth etc. Even if the prices of such commodities rise, consumers do not reduce their demand.

5. Impulsive Purchases: At times consumers tend to make impulsive purchases without any cool calculations about price and usefulness of the product and in such cases the law of demand fails.

6. Outdated Goods: Goods which are outdated due to technological advancements invites lower demand even if they are available at a cheaper price than the current lot which is more technologically advanced. For example, radio sets, heavy dial telephone, audio cassettes etc. are not bought even if they are cheap. Sale of air coolers may go down in the winters even if they are available at lower price.

Conspicuous Necessities: The demand of certain goods is affected by the demonstration effect of the consumption pattern of a social group. These goods, due to their constant usage, have become necessities of life. E.g., in spite of the fact that prices of television sets, refrigerators, coolers, cooking gas have been continuously rising, their demand does not show any tendency to fall.