The law of demand states that, generally, as price increases, the quantity demanded decreases, provided that demand remains unchanged. However, there are notable exception to the law of demand that reflect real-world consumer behavior. Examples of such goods might be Giffen goods or Veblen goods, necessities or situations involving an expectation of future price changes. Despite being a core principle in microeconomics, there are many cases where an exception to the law of demand is observed, especially under abnormal market conditions or psychological buying behavior. Exception to the law of demand states the change in pierce does not change the quantity demand of particular products or services. The law of demand remains a cardinal factor of economics, stating that, all other things held constant, when the price of a good or service goes up, the quantity demanded by consumers goes down, and vice versa. While this should generally hold true in most economic scenarios, there are also some exceptions that plug one's way into establishing how modern and complex an issue consumer behavior and market dynamics really are.

While the law of demand generally holds true, real-world cases highlight several important exceptions of law of demand that students and economists must understand. Exception to the law of demand is a vital topic to be studied for the commerce related exams such as the UGC NET Commerce Examination.

In this article, the readers will be able to know about the following: 

• Law of Demand meaning
• What are the Exceptions to the Law of Demand
• Real-World Examples of an Exception to the Law of Demand
• Detailed Table on Major Exceptions of Law of Demand

Click Here to Download UGC NET Paper 1 Important Questions PDF

What are the Exception to the Law of Demand?

Exceptions to the law of demand refer to situations where the inverse relationship between price and quantity demanded does not hold true. Common examples include Giffen goods, Veblen goods, necessary goods, expectations of future price changes, and luxury items. Supply and demand forces have a big effect on the economic environment. The price continues shifting up and down in a competitive market until there is a fair balancing in supply and demand.

Visual example of a common exception to the law of demand involving price and quantity demanded.

Fig: exception to the law of demand

As an earlier cited example, economics invariably come to the limit of its application to the reality, and so far, the Law of Demand has been no different. A classic case is presented by the law, attempting to explain that with rising prices, the demand would fall; some goods and situations defy this premise. Such exceptions give insight into consumer behavior, social status, or economic necessity. The most common examples include luxury cars, while essentials like bread during an economic crisis present another real-life scenario in which demand increases even as prices rise. Below is a comprehensive table listing real-world exceptions to the law of demand based on behavior and market conditions

Giffen Goods

Giffen goods are a classic exception to the law of demand, where the quantity demanded rises with an increase in price. Giffen goods, introduced by Sir Robert Giffen, are inferior in quality compared to other luxurious goods. But the nature of Giffen goods is that when price increases, demand will also increase, hence becoming an exception to the law of demand.

Giffen goods are items that individuals purchase in greater quantities even if the price increases. For instance, if bread becomes more expensive, poor individuals may purchase more bread since they cannot afford other foods.

Great Depression

when the price of bread increased, its consumption did not fall, as it was a staple in most households. The people gave up other food items and continued to buy bread, which implies that the demand will rise with an increase in price, totally violating the Law of Demand.

The Great Depression was a time when many people lost their jobs and money, and the economy was very bad. For example, during the Great Depression, many families couldn't afford food or clothes.

Veblen Goods

Veblen goods are products whose value increases with an increase in their price. This is the perception: because a product or service has an increased price tag, then it must be of superior quality; hence, people will demand more of the product or service. Examples of such Veblen goods are luxurious products like designer handbags or high sportive cars. Their demand is increased when their prices go up, since owners associate themselves with status and prestige.

Veblen goods are luxurious products that one purchases because he or she wants to display riches. For instance, purchasing an extremely costly sports car just so you can look rich is a Veblen good.

Expectation of Price change

If they expect the price of the good to rise in the near future, they may increase the current consumption of that good. On the other hand, if he expects the price of the good to fall, he may delay purchasing the good to avail at a lower price. For instance, if they thought the country was about to face a drought and, as a result, the price of important commodities would rise, they would rush to buy more of that commodity in advance, increasing demand.

If individuals believe prices are about to increase, they may purchase more today to save. For instance, if you believe video game prices will increase next week, you can purchase one today.

Necessities

Necessities, such as essential food items and basic healthcare, exhibit resilient demand patterns driven by fundamental human needs. Important goods such as drugs, medicines, and staples like salt, rice, and sugar do not observe this law. However high the price may shoot up, people buy these commodities without blinking an eye.

Necessities are what you must live with, such as food, water, and shelter. For instance, all individuals require clothing and clean water to remain healthy.

Change in Income

A change in income can alter purchasing behaviors. If the disposable income of a family is increased, then they will buy more goods even if their price increases. On the other hand, if their disposable income decreases, they might delay in buying that product even if its price falls.

When individuals receive more money, they may purchase more that they desire. For instance, if you receive more allowance, you may be able to buy a new toy or watch a movie with friends.

Luxury Goods

In the case of luxury goods such as designer clothes or high-quality electronic items, people continue buying these products even if their price increases. Luxury goods, characterized by their high prices and status-enhancing qualities, often defy conventional economic principles, showcasing instances where demand may increase as prices rise. Moreover, consumer negligence introduces another layer of complexity, where impulsive or habitual purchasing decisions can lead to suboptimal outcomes. 

Luxury items are costly products individuals purchase because they desire something unique, not necessarily because they require it. For instance, purchasing a high-end watch or designer handbag is a luxury item.

Negligence of Consumer

Sometimes, consumers are unaware of the change in price and thus end up buying at a price higher than the market price. Alfred Marshall is the father of the Law of Demand in the market economy theory. Prices of complementary goods remain the same. The taste and preference of the buyer is constant. Three exceptions to the law of Demand tactics include Giffen goods, Veblen effect, and change in income.

Negligence occurs when an individual fails to pay sufficient attention to where they spend their money. For instance, if one spends all their money on sweets and fails to save for vital items such as school materials, then it is negligence.

Demonstration Effect

A very common phenomenon is that the middle-class consumer tries to imitate the purchasing behavior of the upper class. This increase in purchasing will raise the demand for that particular good or service.

Changes in Taste, Preferences, and Fashion

Any change in consumer taste and preferences, especially for those products that come into fashion, can raise demand even when there is a rise in price. Changes in taste, preferences, and fashion can create exceptions to the law of demand by influencing consumer behavior based on social trends and perceptions.

Individuals' likes and dislikes can shift, and this impacts what they purchase. For instance, if there is a newly released superhero movie that becomes a big hit, more individuals would like to purchase superhero toys.

Stock Exchange Trading

There is no law of demand prevailing in the stock exchange market. Actually, people buy more stocks if the prices of the stocks increase, which is just the opposite of the law. Stock exchange trading can defy the law of demand in financial markets due to speculative behavior and investor sentiment driving demand for stocks. These exceptions highlight the complexity of market dynamics and the various factors beyond price that can affect demand and pricing decisions.

Stock exchange trading is when individuals purchase and sell bits of businesses, referred to as stocks, in an attempt to earn money. For instance, if you purchase a stock in a toy business, and the business performs well, you can sell the stock for additional money in the future.

Detailed Table on Major Exceptions of Law of Demand

Demand Law holds that an inverse relation exists between price and quantity demanded-in other words, the more a good increases in price, the less demand decreases for it; the reverse also being true, ceteris paribus. Evidence from actual situations does not necessarily support the law. Some exceptions to the law include consumer psychology, income effects, speculation, and market anomalies. The following table gives a concise comparison of the major exceptions of law of demand with their causes and practical examples

Conclusion

Understanding the exceptions of law of demand is crucial for decoding complex consumer behavior in economic policy. While the Law of Demand forms a basic tenet in economics, these exceptions manifest the complexity in consumer behavior and market dynamics.From Giffen goods to stock trading behavior, each exception to the law of demand provides a window into how consumer decision-making defies conventional models. Knowledge of these exceptions is therefore hugely important for economists and policymakers to make proper decisions regarding pricing strategies and interventions within the market, even economic policy in general. These exceptions, therefore, show fine lines of buyer response in view of price and market condition changes, going beyond the simple inverse relationship between price and quantity demanded predicted by the Law of Demand. Studying each exception to the law of demand not only prepares you for exams but also helps understand consumer behavior in the real economy

Exceptions to the law of demand is a vital topic per several competitive exams. It would help if you learned other similar topics with the Testbook App.

Exceptions to The Law of Demand Previous Year Questions

Exception to law of demand is____

Option.

1. Diminishing marginal utility
2. Giffen paradox
3. Different uses of products
4. Price of substitute goods

Ans. B. Giffen paradox