Lec 11 Exceptions to the Law of Demand

Exceptions to the Law of Demand
A normal demand curve falls downward from left to right. The basic feature of the demand curve is negative sloping
But sometimes the demand curve may slope upward from left to right. In other words, it may have a positively inclined curve.
These phenomena may due to:
Giffen paradox
Veblen or Demonstration effect.
Ignorance.
Speculative Effect.
Fear of Shortage.
Necessaries
Brand Loyalty
Festival, Marriage etc.

1. Exceptions to the Law of Demand (Exceptional Demand Curve) Unit 11 Instructor: Atta Hussain Syed

2. Exceptions to the Law of Demand (Exceptional Demand Curve) A normal demand curve falls downward from left to right. The basic feature of demand curve is negative sloping But sometimes the demand curve may slope upward from left to right. In other words it may have a positively inclined curve. These phenomena may due to: Giffen paradox Veblen or Demonstration effect. Ignorance. Speculative Effect. Fear of Shortage. Necessaries Brand Loyalty Festival, Marriage etc.

3. 1. GIFFEN PARADOX This paradox is first explained by Sir Robert Giffen . The Giffen goods are inferior goods is an exception to the law of demand. When the price of inferior good falls, the poor will buy less and vice versa. Sir Robert Giffen Scottish Statistician and Economist

4. 1. GIFFEN PARADOX When the price of maize falls, the poor will not buy it more but they are willing to spend more on superior goods than on maize. Thus fall in price will result into reduction in quantity.

5. 2.VEBLEN OR DEMONSTRATION EFFECT According to Veblen, rich people buy certain goods because of its social distinction or prestige. Diamonds and other luxurious article are purchased by rich people due to its high prestige value. Hence higher the price of these articles, higher will be the demand. Thorstein Veblen American Economist and Sociologist

6. 2.VEBLEN OR DEMONSTRATION EFFECT Demonstration effect is the effect of a person's behavior, particularly with respect to consumption in economics.   James Duesenberry , in his consumption theory, advocated that demonstration effect comes in to picture when one persons consumes something by seeing another person or to show some one and not due to his own original likes and dislikes .   James Stemble Duesenberry American Economist

7. 4.IGNORANCE Some times consumers think that the product is superior or quality is high if the price of that product is high. As such they buy more at high price.

8. 4.SPECULATIVE EFFECT When the price of commodity is increasing, then the consumer buy more of it because of the fear that it will increase still further .

9. 5.FEAR OF SHORTAGE During the time of emergency or war, people may expect shortage of commodity and buy more at higher price to keep stock for future.

10. 6.NECESSARIES In the case of necessaries like rice, vegetables etc., People buy more even at a higher price.

11. 7.BRAND LOYALTY When consumer is brand loyal to particular product or psychological attachment to particular product, they will continue to buy such products even at a higher price.

12. 8. FESTIVAL, MARRIAGE Etc. In certain occasions like festivals, marriage etc. people will buy more even at high price.