Exceptions to the law of demand: we know that as per law of demand, as price increases, quantity demanded decreases and as price decreases, quantity demanded increases. This law is applicable in most of the cases. However, there are certain cases where this law is not applicable. These are exceptions to the law of demand.

The following points are important exceptions to the law of demand:

Let us understand each of these points of exception of demand in detail:

• Conspicuous goods: articles of prestige value or snob appeal or articles of conspicuous consumption used by rich people as status symbols for enhancing social prestige and/or for displaying wealth. These articles won’t follow the law of demand, as they become more attractive only at higher prices or when the price goes up. This was found out by Veblen in his doctrine of “ Conspicuous consumption” and hence this effect called Veblen effect or prestige goods effect. The Veblen effect takes place as some consumers measure the utility by its price. I.E, higher the price, higher is the utility attached to it. Diamonds are an example of conspicuous goods. Higher the price, higher will be the demand for diamonds.
• Giffen goods: Sir Robert Giffen, a Scottish economist and statistician, was surprised to find out that as the price of bread increases the quantity demanded for bread also increases. This was something against the law of demand. But why did this happen? The reason being as soon as the bread prices went up, there was such a sharp decline in the purchasing power of the poor people that they were forced to cut down the consumption of other expensive goods as bread, even at higher price, was still the cheapest food. Such goods which exhibit direct price and demand relationships are called giffen goods. Generally those goods which are inferior with no close substitutes available and occupy a substantial place in consumer income’s budget are called giffen goods. All giffen goods are inferior goods, but all inferior goods are not giffen.

Note: purchasing power means the financial ability to buy products or services.

• Conspicuous  necessities: the demand for certain goods is affected by the demonstration effect of the Consumption  pattern of a social group to which an individual belongs. These goods, due to their constant usage, become necessities of life. For example, even the prices of television sets, fridges,etc. Keep on rising, their demand does not show any tendency to fall.
• Future expectations about prices: when the prices are rising, households expecting that the price in the future will increase, tend to buy larger quantities of such commodities. For example, when there is a wide-spread drought, people expect that prices of foodgrains would rise in future.hence, they demand higher quantities of foodgrains even at higher prices. On the contrary, if the prices are falling, and people anticipate further falls, then they postpone their purchases. However, since one of the factors I.E, future expectations of price changes which is one of the important assumptions required to be constant in law of demand. Hence, the law of demand is not invalidated.
• Incomplete information and irrational behavior: the law of demand has been derived assuming consumers to be rational and knowledgeable about market-conditions. However, at times, consumers have incomplete information and therefore, make inconsistent decisions regarding the purchases. Also, households may demand large quantities of goods even at higher prices because they may be ignorant of the price of the ruling commodity. Under such circumstances, the law of demand is invalidated. Sometimes, consumers tend to be irrational and make impulsive purchases without any rational calculations about the price and usefulness of the product. In such cases also the law of demand is invalidated.
• Demand for necessaries: the law of demand does not apply in case of necessaries of life. As irrespective of price changes, people have to consume minimum quantities of necessary commodities.
• Speculative goods: In speculative markets, specially in the market of stocks and shares, more will be demanded when prices are rising and less will be demanded when prices fall.

The law of demand will also fail if there is any significant change in other factors for which the demand for a commodity depends. Like change in the income of the household or taste and preferences, etc. the inverse price and demand relationship may not hold good.

Expansion and contraction of demand: The demand schedule, the demand curve and the law of demand all show that:

Expansion of demand:  when as a result of decrease in price, the quantity demanded increases, there is an expansion of demand. Expansion means to spread I.E. ⇒⇒,

Contraction of demand: When as a result of increase in price, the quantity demanded decreases we say that there is contraction of demand. Contraction means to reduce I.E. ⇚⇚.

Consider this hypothetical data:

Let us identify expansion and contraction of demand for above hypothetical data:

When the price of apples falls from RS. 100 to RS. 80, the quantity demanded increases from 1 kg to 2kgs. Thus, we can say that there is expansion of demand. On the other hand, when the price of apples increases from RS. 80 to RS.150, the quantity demanded decreases from 2 kgs to 1.5 kgs. We can say that there is contraction of demand.

Note: it is assumed that other factors such as income, price of other goods, taste of consumers remain the same.

The expansion and contraction of demand is shown in the below figure. 

Diagram: will be updated shortly

Explanation:

Interpretation: we have assumed that other determinants of demand remain constant while analyzing demand for a commodity. An important point to consider is while expansion and contraction of demand take place as a result of change in price while all other determinants of price such as income, taste, preferences, propensity to consume and price of related goods remain constant. The other factors remaining constant means that the position of the demand curve remains the same and consumers move upwards or downwards on it.

Increase and decrease in demand:Till now, we have assumed that all other determinants of demand remain constant while determining demand for a commodity.  There are factors other than price or conditions of demand which might either cause an increase or decrease in the quantity of a particular good or services that the buyers are willing to buy at a particular price. What happens if there is a change in:

To understand this consider this hypothetical data to study the effect of possible increase in income of the quantity demanded of good X.

Consider this hypothetical data: Two demand schedule for commodity X

Diagram:

Interpretation: two sets of data plotted in the above figure :

With an increase in income, the demand curve for X has shifted to the right from DD to D1D1, indicating an increase in demand.

You can find a similar increase in demand at each price. Since an increase in price would occur irrespective of what the price is, the result would be a shift to the right of the entire demand curve.

When can  we say there is an increase in demand? : any change that increases the quantity demanded at every price shifts the demand curve to the right and is known as increase in demand.

When can  we say there is a decrease in demand?: any change that decreases the quantity demanded at every price shifts the demand curve to the left  and is known as decrease in demand.

Diagram:

Interpretation: in the above figure, we can see an increase and decrease in demand. When there is an increase in demand, the demand curve shifts to the right and more quantity will be purchased at a given price (Q1 instead of Q at price P). A decrease in demand curve causes the entire  demand curve to shift to the left, and we find that less quantity bought at the same price P.

Effect of non-price determinants of demand:

Movements along the demand curve VS. shift of demand curve: it is important for business decision-makers to understand the difference between a Movement along the demand curve and a shift of the whole demand curve:

Movement of the demand curve: indicates change in quantity demanded because of price changes, other factors remaining constant.

Shift of demand curve: indicates that there is a change in quantity demanded at each possible price because of one or more other factors, such as:

Thus, when an economist speaks of an increase or decrease in demand, he refers to the shift of the whole curve because one or more factors which assumed to be constant to have changed. When an economist speaks of change in quantity demanded means movement along the same demand curve, i.e., (expansion or contraction of demand) which has happened due to fall or rise in the commodity.

Points to be noted:

• When demand increases due to factors other than price, firms can sell more at existing prices, resulting in increased revenue at the same prices
• The objectives of sales promotion and advertisement activities is to shift the demand curve to the right and reduce the elasticity of demand
• However, the additional demand is not free of costs, as firms have to incur expenditure on sales promotion and advertisement activities.
  
  Test yourself:

Authored by: Kamaishi Singhvi

Thanks for Reading, Always welcome.