EXCEPTIONS TO

LAW OF DEMAND

Teng, J
DEMAND www.slideshare.com

 Demand is desire/ want, backed by ability to pay.

 It is the amount of buyers who are willing to purchase the products and services at a
given price over a given period of time

LAW OF DEMAND

 Ceteris paribus, the quantity of goods demanded at a particular price, at a particular

point of time, varies inversely with its price.
Qd = f ( Px )

Demand for a commodity is the function of its price.

Exceptions

 Goods that obey the law of demand are normal goods.

 There are goods which doesn’t obey the law of demand

 Such goods are either superior goods or inferior goods

 Named as Veblen and Giffin goods respectively

VEBLEN GOODS
 source:www.tutor2u.net

VEBLEN GOODS:
 Veblen goods are things primarily bought to show-off the wealth.
 Positional good.
 Veblen effect : Extent to which the demand for a consumer
product increases, owing to the fact that, it
bears a higher price than the other commodities.
 If the price decreases, then more people can
afford them and they become less effective as
an indicator of wealth, so demand falls.
 This phenomenon is snob effect: Extent to which
demand of a commodity is decreased, owing to
the fact that more people are using the same
commodity
Ostentatious consumption

 Examples are luxury items like perfumes, luxury cars, Designer clothes and
handbags etc.
 Satisfaction increases due to the possession of high priced good.
 The demand for the product is a direct function of its price.

Classic example - VI which is considered to be the most exclusive perfume in the

world. Only 475 bottles have been produced and bottles have been selling for
£47,500 each – a classic case of paying through the nose for an exclusive good.

 have a high-income elasticity of demand.

(demand rises more than proportionately
to an increase in income.)
Income elasticity of Veblen goods.

 Normal goods have a positive income elasticity of demand, (income rises, demand also rises.)

NORMAL GOODS

Necessities Luxuries.
Elasticity btw 0 and 1 Elasticity greater than 1
Slower rate of inc: Faster rate of inc:

 For example (luxury) a 8% increase in income might lead to a 16% rise in the demand for
restaurant meals. The income elasticity of demand in this example +2.0. Demand is highly
sensitive to (inc: or dec: in) income.
 www.marketwatch.com

 The World Gold Council -

Gold Prices
demand from Asia remains high
for gold. The standout markets
were India and China, (52% ).

 due to increasing levels of

economic prosperity,

 forthcoming key gold purchasing

festivals.

 European sovereign debt crisis

and the downgrading of US debt,

 inflationary pressures, is driving

of 'investment demand.
CARS

 Owning a car was once a luxury.

 Now, nobody goes for brands that were once considered ‘luxury’
VANITY BAG

 Concept of vanity bag is long gone now. Bags are not vanity bags anymore.
They have given way to designer handbags.
WATCHES

 Watches are becoming a status symbol than a utilitarian good.

 Even though the purpose of a watch is to show time, people purchase a
Rado or Rolex to show off their wealth.
 Haute Couture
Haute couture dresses are very few in
number

 Hence very expensive.

 Thus owning a designer clothing, is a

mark of prestige.
SUMMARY

 When Price inc: demand dec:

 Called Goods of conspicuous consumption.

 Gives psychic satisfaction. not material satisfaction.

 In case of some Veblen goods (paintings, antiquities etc.), supply is not controlled
by demand.

 in boom times, demand for luxury goods grow faster than the growth of economies
(as measured by GDP).

 slowdowns can cause sales to retreat rapidly, as consumers buy fewer high-priced
luxury goods.
GIFFEN GOODS
 www.buzzle.com

 Giffen good is a good that which decreases in demand when consumer

income rises.
 Income elasticity is less than 0
 Giffen goods can be categorized into three.

a. necessary staple goods

VICTORIAN SOCIETY

 purchasing tendency of the poor Victorian subjects

 when the price of necessary staple goods such as bread, food grain,
vegetables, etc., rose, the poorer sections, concentrated all their purchasing
power on procuring the necessary staples.
 gave up on purchasing other goods
 This kept the demand for these good high despite an increase in their price.
IRISH SOCIETY

 people were so poor

 as the price of potatoes rose, they started substituting
potatoes, a dietary staple, for meat and other unnecessary
luxuries.
 The Irish consumed more potatoes as a result.

CHINESE SOCIETY
 They consume more rice or noodles, their staples, as prices go up.
 People need a certain amount of calories to survive that can be either got by
consuming rice and some vegetables alone, or by eating rice, vegetables and a few
bites of meat.
 But meat is expensive. Poor Chinese can no longer afford the luxury of cooking
meat,
 So they eat rice instead, which is still relatively cheap compared to meat.
 This is Giffen behaviour in action.
b. inferior goods
 those for which the demand rises when the price to procure them forms a relatively
substantial part of the buyer's income without eating into the amount of income set
aside for the consumption of other regular items.

 Cheaper cars are examples of the inferior goods.

 generally prefer cheaper cars when their income is constricted.
 As a income increases the demand of the cheap cars will decrease,
while demand of costly cars will increase, so cheap cars are inferior goods.

 Inter-city bus service is also an example of an inferior good. This form of

transportation is cheaper than air or rail travel.
 When money is constricted, travelling by bus becomes more acceptable.
 but when money is more abundant than time, more rapid transport is preferred.
 Inexpensive foods like hamburger, mass-market beer, frozen dinners, and
canned goods.
 As incomes rise, one tends to purchase more expensive, appealing and
nutritious foods.

 Some inferior goods are so consistent that they can be seen as economic
indicators. One such example is instant noodles,
 increase in the Thai "Mama Noodles Index" (the number of the popular
Mama-brand instant noodles sold) in 2005,
 seen as a sign of weakness.
c. experience goods

 The utility and quality of certain goods and services can be observed and decided
only after using those products or services.
 In such cases, a drop in price is often interpreted as a drop in quality or utility of the
product or service.

health and beauty care services.