The law of demand states that, other things remaining the same, the quantity demanded of a commodity is inversely related to its price.
Other things remaining the same, the amount demanded increases with a fall in price and diminishes with a rise in price.
Thus, according to the law of demand, there is an inverse relationship between price and quantity demanded, other things remaining the same.
Law of demand expresses the functional relationship
D = f (P)
P is price and
D is quantity demanded of a commodity
Other things being equal, if a price of a commodity falls, the quantity demanded of it will rise, and if the price of the commodity rises, its quantity demanded will decline.
Assumptions under which law of demand is valid
This law will be applicable only if the below mentioned points are fulfilled.
- No change in price of related commodities.
- No change in income of the consumer.
- No change in taste and preferences, customs, habit and fashion of the consumer.
- No change in size of population
- No expectation regarding future change in price.
Exceptions to the Law of Demand
In an economy, the chief determinants of the market conditions are demand and supply factors. In the competitive markets, the price range of the product keeps fluctuating as long as Demand and supply aren’t equalled. This situation is equilibrium. There are specific exceptions to the law of Demand that we will explore now. In economics, the law of Demand is true to the lines for most cases. However, some significant exceptions are there. For instance, even if the Price for Cigarettes goes up, its Demand won’t reduce. The exceptions to the law of demand typically suit the Giffen commodities, Veblen and essential goods. Let us have a look at these exceptions in detail now.
Exceptions to the Law of Demand
- Veblen Goods
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.
- 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.
- Necessary Goods
Let us understand what are the exceptions to the law of demand in case of necessary items. 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.
- Luxury Goods
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.
- Income Change
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.