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Exceptions to the Law of Demand and its Determinant
Exceptions to the Law of Demand and its Determinant.
Marshall the great economist has assumed the following main factors as a constant one for the validity to its law of demand.
- Income of the consumer
- Tastes, preferences, habits and customs
- Price of related goods
- Expectation regarding future prices
- Level of taxes or Government's policy
- Weather conditions
- No new product
- Distribution of income and wealth and
Exception to the Law:
Some times, we find that with a fall in the price demand also falls and with a rise in price demand also rises. These cases are referred to as exceptions to the general law of demand. The demand curve in these cases will be an upward sloping. Some of these exceptions are:
- Giffen goods or Inferior goods.
- Prestige goods
- Price Illusion
These different types of exceptions are described in brief explanation as follows:-
- Inferior goods:
Some goods like potato, bread, vegetable oil etc. are called inferior goods. In the case of these goods when their price falls, the real income or the purchasing power of the consumer increases, this purchasing power is used to buy other superior goods. Such inferior goods are named as 'Giffen goods'. An Irish economist Sir Robert Giffen observed this tendency of the individuals in the 19th century.
- Expectations and speculations:
When people expect a rise or fall in price in the near future, the law of demand does not hold good. If a price rise is expected by next week, then they will buy more now itself though at present the prices are quite high.
- Prestige goods:
Rich people like to show off their economic status. SO they buy prestige goods like colour T.V., diamond etc. even at a higher price.
- Price illusion:
There are certain consumers those who are always guided by the price of the commodity. They always believe that higher the price, better the quality. Hence they purchase larger quantities of high priced goods.
- Demonstration effect:
It refers to a tendency of low income groups to imitate the consumption pattern of high income groups. They will buy a commodity to imitate the consumption of their neighbors even if they don't have the purchasing power.
Sometimes due to ignorance of existing market price, and people buy more at a higher price.
- Quality and Branded Goods:
Commodities of good standard and quality give proper value for money. They last long and give good service. So people prefer to buy them even at a higher price.
In the above exceptional cases, the demand graph curve slopes upward showing a positive relationship between price and demand.
Determinants of Demand:
The determinants of demand have been explained in brief as follows:
The price of a commodity is an important determinant of demand. price and demand are inversely related. Higher the price less is the demand and vice versa.
- Price of related goods:
The price of related goods like substitutes and complementary goods also affect the demand. In the case of substitutes, rise in price of one commodity lead to increase in demand for its substitute. In the case of complementary goods, fall in the price of one commodity lead to rise in demand for both the goods.
This is directly related to demand. If the disposable income increases, demand will be more.
- Taste, preference, fashions and habits:
These are very effective factors affecting demand for a commodity.
If the size of the population is more, demand will be more for goods.
- Money Circulation:
More money in circulation, more will be the demand and vice versa.
- Weather Condition:
It is also an important factor to determine the demand for certain goods.
- Advertisement and Salesmanship:
If the advertisement is very attractive for a commodity, demand will be more and if the salesmanship and publicity is effective then the demand for the commodity will be more.
- Speculation: If the consumers expect a change in price in near future then their present demand will not vary inversely with the present change in price.
- Government policy:
High taxes will increase the price and and reduce demand, while low tax will reduce the price and extend the demand.
So by this we have completed with the exceptions and determinants to the law of demand.
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