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7 Exceptions to the Law of Demand

So far we have examined the inverse relationship/association between demand and price of a product. The law of demand stated that with the increase in the price of a particular product would reduce the demand for that product and vice versa.

In simple words, exceptions to the law of demand refer to conditions where the law of demand is not applicable. In case of exceptions, the demand curve shows an upward slope and referred to as the exceptional demand curve.

However, there are a few exceptions to the law of demand: with lower prices, demand also increases and decreases with rising prices. This situation is paradoxical and is considered an exception to the law of demand. In simple terms, the exception to the law of demand designates the conditions under which the law of demand does not apply. In exceptional cases, the demand curve has an upward (from left to right) slope and is referred to as an exceptional demand curve.

An exceptional demand curve is shown in Figure-1:

 

7 Exceptions to the Law of Demand

Figure 1: Upward moving demand curve.

In Fig. 1, D represents the upward moving demand curve. In which if you take any two points e.g. A where OP1 is the price and OQ1 is the initial demand. As the price of OP1 increases to OP2, the demand from OQ1 to OQ2 also increases e.g. B (do this on your notebook).  This implies that as the price of a product rises, so its demand rises too, which is an exception to the demand law.

7 exceptions to the law of demand

These are 7 fundamental exceptions to the law of demand. All of them are very important and each exception has its own implications.

1. Necessity Goods:

The consumer products which are considered as essential because of their use in daily life. With the change (increase or decrease) in the price of these products, the demand and supply do not change (increase or decrease). For example, medicine is one of the product from necessities group whose consumption cannot be increased because of falling prices. In such a scenario, the right of application is not applicable. This is first exception to the law of demand.

vertical demand curve, exceptions to the law of demand

Figure 2: Vertical Demand Curve

For such products, the demand curve is a straight vertical line, as shown in Figure 2. At an OP1 price, the consumer of stomach patients asks for “Rabeprazole” at OD. Despite the price increase at OP2, the consumer buys the same amount because of his/her need.

2. Giffen Paradox:

The second exception to the law of demand is about Giffen paradox is one of the main criticisms of the Law of Demand. Giffin Paradox was presented by Sir Robert Giffen, who divided the goods into two groups, the superior goods, and the inferior goods, the superior goods are commonly referred to as Giffen Goods. By inferior goods are meant those whose demand decreases with increasing consumer income, such as potatoes and edible oil.

These goods are of poor quality or you may say having low quality. As a result, demand for these products decreases with increasing consumer income. As the price of these products increases, so does the demand for these products, provided that the high price is of good quality, for example, coffee is superior-good while tea is considered inferior good. If the price of these two products increases, consumers would increase the demand for tea to meet their needs by paying the same amount.

3. Psychologically Bias Customers:

Please note third important exception to the law of demand. Different customers have different ideas/views about the price of a product. Some customers feel that the low price is synonymous with poor quality of a particular product, which is not always the case. Therefore, when the price of a product falls, the demand for that product automatically decreases.

4. Prestigious Goods:

The products which are considered status icons or showing the elite class, e.g. Diamond, Gold, and Johny Walker Scotch Whiskey. Demand for these goods remains the same when price increases or decreases. Consequently, the law of demand is not applicable to such products, which is fourth exeception to law of demand.

5. Brand Loyalty:

The fifth execption to the law of demand refers to a consumer’s preference for a particular brand. Most of the consumers are very sticky with the brands which they used in daily life and very hardly switch the brand. They buy the products of that brand regardless of the change in price. For instance, let a consumer prefers Levi’s jeans, he will continue to buy them regardless of the price increase. In this scenario, the application of the law of demand will be considered as void.

6. Speculation:

The sixth execption to the law of demand is about speculation plays a vital role in neglecting the demand theory. Speculation means the assumptions which a rationale consumer makes for future developments by keeping in view the particular product.

In this case, if a consumer makes an assumption that the price of a particular product will increase in the future then he buys more of it regardless of price in the current situation.  However, this violates the law of demand.

7. Emergency Situations:

The last exception to the law of demand is about emergency conditions such as earthquakes, floods, scarcity, famine, war or any untoward situations consumers are not thinking about the change in price and buy the products regardless of price variations and tried to store as much as products. Therefore, in such situations, the law of demand is not applicable.

Muhammad Waqas Khalid
About Him: He has done Master of Philosophy in Economics in 2016 by paying special attention to the development of research skills. He has worked as a Research Associate at the London School of Economics. He has 6 years of experience in writing. He has published many research articles and some of them got published in impact journals too. Check his work at Google Scholar: https://scholar.google.com/citations?user=RiGg9YIAAAAJ&hl=en His Expertise: He has both quantitative and qualitative expertise. He has command over different statistical packages/software i.e. SPSS, Eviews, STATA, Microfit, MS Excel, etc. and He is willing to help you out in your assignments or thesis etc.
http://www.beingeconomist.com

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