Exceptions to the Law of Demand

The law of demand states that an increase in the price of a commodity leads to a decrease in the quantity demanded of the product, while a decrease in price leads to a rise in demand. This law leads to a negatively or downward sloping demand curve. However, there are some demand curves that slopes upwards from left to right showing that as the prices of a product rise more quantities of the product is demanded and vice versa. This type of demand curve is known as regressive, exceptional or abnormal demand curve and occurs in the following situations:

  • When there is fear of a more drastic price changes in the future. This will cause consumers to increase their quantity demanded to avoid paying a higher price in the future. This situation is often found in the stock exchange where there is often an increase in the demand of shares of a company if its shares are expected to increase.
  • Giffen goods: This refers to basic foodstuffs that constitute a high proportion of the budget of low income families. When the price of a giffen good rises, the proportion of the total income of individuals who consumes these giffen goods rises and since such consumers are worse off in real terms, they can no longer afford to consume other more expensive commodities like meat and fruits. To make up for the goods they can no longer afford to buy, they are more likely to purchase more of basic foodstuffs; conversely when the price of basic foodstuffs falls, they become better-off in real terms and are likely to buy more or relatively more expensive foodstuffs and less basic foodstuffs; i.e. ugali and meat.
  • Goods of ostentation (Veblen goods). These are commodities whose prices fall in the upper price ranges and that have a snob appeal. The wealthy are usually concerned about status. Believing that only goods at high prices are worth buying and worth the effect of distinguishing them from other consumers. In the case of such commodities, a firm increasing its prices may find that the sales of its product increase and at lower prices less of the commodity maybe bought as the commodity is rejected as being substandard. Consumers often in making comparisons between similar products with different prices opt for relatively more expensive product, believing it to be better. As prices increase demand increases this is referred to as snob effect. Examples of goods of ostentation are expensive perfume, jewelry, cars, clothes, etc. The demand curve will be positively slopping as indicated in Figure 2.2.

Veblen goods demand curve

  • Inferior goods: these are goods assumed to be of low quality compared to others available that can be used to satisfy same want. An increase in price of an inferior good may be taken to mean an improvement in quality. Demand for such commodities will hence tend to increase with increase in prices.
  • Expectation of future shortages: consumers buy more of a commodity whose prices are rising due to the expectation of a future shortage of the commodity.
  • Necessities: they are necessary for life. Demand will not change even if prices go up.
  • Habitual goods and services: a consumer will consume certain goods and services at same quantity at any price because these goods have become habitual and one can’t do without them e.g. addictives i.e. drugs.

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