ASSIGNMENT

On
Exemption in Price demand Relation
Course Title: MicroEconomics

Course Code: THM-212

BTHM 5th Batch

Department of Tourism and Hospitality Management,
Leading University

SUBMITTED TO:

Ms. Juhora Jamin Juha

Lecturer,
Tourism and Hospitality Management, Leading University

SUBMITTED BY:

“Benz 5”

SL Name ID

1 Fahim Khan 1911100021

2 Md. Forhad Ahmed 1911100006

3 Masrur Daiyan 1911100013

Introduction

The law of demand is one of the most fundamental concepts in economics. It works with the law
of supply to explain how market economies allocate resources and determine the prices of goods
and services that we observe in everyday transactions. The law of demand states that quantity
purchased varies inversely with price. In other words, the higher the price, the lower the quantity
demanded. This occurs because of diminishing marginal utility. That is, consumers use the first
units of an economic good they purchase to serve their most urgent needs first, and use each
additional unit of the good to serve successively lower valued ends.

We all know that supply and demand factors influence the market conditions of an economy and
determine the prices of goods and services. In a competitive market, the price conditions of a
product or service will keep varying until the demand equals the supply thereby creating
equilibrium. Let us look at some exceptions to this law of demand like giffen goods, necessary
goods, etc.

Law of Demand

Now the law of demand states that all conditions being equal, as the price of a product increases,
the demand for that product will decrease. Consequently, as the price of a product decreases, the
demand for that product will increase. For instance, a consumer may buy two dozens of bananas
if the price is 50tk

However, if the price increases to 70tk then the same consumer may restrict the purchase to one
dozen. Hence, the demand for the bananas, in this case, was reduced by one dozen. Therefore,
the law of demand defines an inverse relationship between the price and quantity factors of a
product.
The graph shows the demand curve shifts from D1 to D2, thereby demonstrating the inverse
relationship between the price of a product and the quantity demanded.

Giffen Goods

Giffen Goods is a concept that was introduced by Sir Robert Giffen. These goods are goods that
are inferior in comparison to luxury goods. However, the unique characteristic of Giffen goods is
that as its price increases, the demand also increases. And this feature is what makes it an
exception to the law of demand.

The Irish Potato Famine is a classic example of the Giffen goods concept. Potato is a staple in
the Irish diet. During the potato famine, when the price of potatoes increased, people spent less
on luxury foods such as meat and bought more potatoes to stick to their diet. So as the price of
potatoes increased, so did the demand, which is a complete reversal of the law of demand.

For Example, Suppose the minimum monthly consumption of food grains by a poor household is
20 Kg (Inferior good) and 10 Kg Rice (superior good). The selling price of grains is 5tk per kg,
and the rice 10tk per kg, and the household spends its total income of 200tk on the purchase of
these items. Suppose, the price of grain rose to 6tk per kg then the household will be forced to
reduce the consumption of rice by 5 Kg and increase the quantity of grains to 25 Kg in order to
meet the minimum monthly requirement of food grains of 30 kg.

Veblen Goods

The second exception to the law of demand is the concept of Veblen goods. Veblen Goods is a
concept that is named after the economist Thorstein Veblen, who introduced the theory of
“conspicuous consumption“. According to Veblen, there are certain goods that become more
valuable as their price increases. If a product is expensive, then its value and utility are perceived
to be more, and hence the demand for that product increases.

And this happens mostly with precious metals and stones such as gold and diamonds and luxury
cars such as Rolls-Royce. As the price of these goods increases, their demand also increases
because these products then become a status symbol.

For example, goods like a diamond, platinum, ruby, etc. are bought by the upper echelons of the
society (rich class) for whom the higher the price of these goods, the higher is the prestige value
and ultimately the higher is the utility or desirability of them.

The expectation of Price Change

In addition to Giffen and Veblen goods, another exception to the law of demand is the
expectation of price change. There are times when the price of a product increases and market
conditions are such that the product may get more expensive. In such cases, consumers may buy
more of these products before the price increases any further. Consequently, when the price
drops or may be expected to drop further, consumers might postpone the purchase to avail the
benefits of a lower price.
For instance, in recent times, the price of onions had increased to quite an extent. Consumers
started buying and storing more onions fearing further price rise, which resulted in increased
demand.

There are also times when consumers may buy and store commodities due to a fear of shortage.
Therefore, even if the price of a product increases, its associated demand may also increase as
the product may be taken off the shelf or it might cease to exist in the market.

Ignorance

Often people are misconceived as high-priced commodities are better than the low-priced
commodities and rest their purchase decision on such a notion. They buy those commodities
whose price are relatively higher than the substitutes

Emergencies

During emergencies such as war, natural calamity- flood, drought, earthquake, etc., the law of
demand becomes ineffective. In such situations, people often fear the shortage of the essentials
and hence demand more goods and services even at higher prices.

Necessary Goods and Services

Another exception to the law of demand is necessary or basic goods. People will continue to buy
necessities such as medicines or basic staples such as sugar or salt even if the price increases.
The prices of these products do not affect their associated demand.
Change in Income

Sometimes the demand for a product may change according to the change in income. If a
household’s income increases, they may purchase more products irrespective of the increase in
their price, thereby increasing the demand for the product. Similarly, they might postpone buying
a product even if its price reduces if their income has reduced. Hence, change in a consumer’s
income pattern may also be an exception to the law of demand.

Here is an Example;

Q: Which of the following is a Veblen Good?

1. Potatoes
2. Salt
3. Luxury Car
4. None of the above

Ans: The correct answer is 3. A luxury car is a Veblen good. They are expensive products whose
value increases if the price is higher. More expensive the product, the higher its value.

Assumptions of the Law of Demand:

These assumptions are:

(i) There is no change in the tastes and preferences of the consumer;

(ii) The income of the consumer remains constant;

(iii) There is no change in customs;

(iv) The commodity to be used should not confer distinction on the consumer;

(v) There should not be any substitutes of the commodity;

(vi) There should not be any change in the prices of other products;
(vii) There should not be any possibility of change in the price of the product being used;

(viii) There should not be any change in the quality of the product; and

(ix) The habits of the consumers should remain unchanged. Given these conditions, the law of
demand operates. If there is change even in one of these conditions, it will stop operating.

Given these assumptions, the law of demand is explained in terms of Table 3 and Figure 7.

The above table shows that when the price of say, orange, is TK 5 per unit, 100 units are de-
manded. If the price falls to TK4, the demand increases to 200 units. Similarly, when the price
declines to Re.1, the demand increases to 600 units. On the contrary, as the price increases from
Re. 1, the demand continues to decline from 600 units.

In the figure, point P of the demand curve DD1 shows demand for 100 units at the TK 5. As the
price falls to TK 4, TK 3, TK 2 and Re. 1, the demand rises to 200, 300, 400 and 600 units
respectively. This is clear from points Q, R, S, and T. Thus, the demand curve DD1 shows
increase in demand of orange when its price falls. This indicates the inverse relation between
price and demand.
Exceptions to price of Demand:

In certain cases, the demand curve slopes up from left to right, i.e., it has a positive slope. Under
certain circumstances, consumers buy more when the price of a commodity rises, and less when
price falls, as shown by the D curve in Figure 8. Many causes are attributed to an upward sloping
demand curve.

(i) War: If shortage is feared in anticipation of war, people may start buying for building stocks
or for hoarding even when the price rises.

(ii) Depression:
During a depression, the prices of commodities are very low and the demand for them is also
less. This is because of the lack of purchasing power with consumers.

(iii) Giffen Paradox:

If a commodity happens to be a necessity of life like wheat and its price goes up, consumers are
forced to curtail the consumption of more expensive foods like meat and fish, and wheat being
still the cheapest food they will consume more of it. The Marshallian example is applicable to
developed economies.

In the case of an underdeveloped economy, with the fall in the price of an inferior commodity
like maize, consumers will start consuming more of the superior commodity like wheat. As a
result, the demand for maize will fall. This is what Marshall called the Giffen Paradox which
makes the demand curve to have a positive slope.

(iv) Demonstration Effect: If consumers are affected by the principle of conspicuous consump-
tion or demonstration effect, they will like to buy more of those commodities which confer
distinction on the possessor, when their prices rise. On the other hand, with the fall in the prices
of such articles, their demand falls, as is the case with diamonds.

(v) Ignorance Effect:

Consumers buy more at a higher price under the influence of the “ignorance effect”, where a
commodity may be mistaken for some other commodity, due to deceptive packing, label, etc.
(vi) Speculation: Marshall mentions speculation as one of the important exceptions to the down-
ward sloping demand curve. According to him, the law of demand does not apply to the demand
in a campaign between groups of speculators. When a group unloads a great quantity of a thing
on to the market, the price falls and the other group begins buying it. When it has raised the price
of the thing, it arranges to sell a great deal quietly. Thus when price rises, demand also increases.

(vii) Necessities of Life:

Normally, the law of demand does not apply on necessities of life such as food, cloth etc. Even
the price of these goods increases, the consumer does not reduce their demand. Rather, he
purchases them even the prices of these goods increase often by reducing the demand for
comfortable goods. This is also a reason that the demand curve slopes upwards to the right.

Recommendation

Inverse Relationship of Price and Demand

The price of a good or service in a marketplace determines the quantity that consumers demand.
Assuming that non-price factors are removed from the equation, a higher price results in a lower
quantity demanded and a lower price results in higher quantity demanded.

Inverse Relationship of Price and Demand The price of a good or service in a marketplace
determines the quantity that consumers demand. Assuming that non-price factors are removed
from the equation, a higher price results in a lower quantity demanded and a lower price results
in higher quantity demanded. Demand Increase: price increases, quantity increases. Demand
Decrease: price decreases, quantity decreases. Supply Increase: price decreases, quantity
increases. Supply Decrease: price increases, quantity decreases.
Conclusion

Analyzing demand is a part of business planning, every company have to know about the number
of quantity to set the price rise that compete with competitor in the market. The Apple Company
has a lot of products which need to be analyzed for different market, help Apple Company know
how many products to produce and set suitable prices.

Reference

https://www.intelligenteconomist.com
https://www.khanacademy.org
https://www.toppr.com/
https://www.researchgate.net