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| 1. |
Exceptions to the Law of Demand |
| Answer» <p>1)Giffen Goods: Giffen goods are the inferior goods whose demand increases with the increase in its prices. There are several inferior commodities, much cheaper than the superior substitutes often consumed by the poor households as an essential commodity. Whenever the price of the Giffen goods increases its quantity demanded also increases because, with an increase in the price, and the income remaining the same, the poor people cut the consumption of superior substitute and buy more quantities of Giffen goods to meet their basic needs.</p><p>For Example, Suppose the minimum monthly consumption of food grains by a poor household is 20 Kg Bajra (Inferior good) and 10 Kg Rice (superior good). The selling price of Bajra is Rs 5 per kg, and the rice is Rs 10 per kg, and the household spends its total income of Rs 200 on the purchase of these items. Suppose, the price of Bajra rose to Rs 6 per kg then the household will be forced to reduce the consumption of rice by 5 Kg and increase the quantity of Bajra to 25 Kg in order to meet the minimum monthly requirement of food grains of 30 kg.</p><p>2)Veblen Goods: Another exception to the law of demand is given by the economist Thorstein Veblen, who proposed the concept of “Conspicuous Consumption.” According to Veblen, there are a certain group of people who measure the utility of the commodity purely by its price, which means, they think that higher priced goods and services derive more utility than the lesser priced commodities.</p><p>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.</p> <p>There are twoexceptions to the Law of Demand. Giffen and Veblen goods areexceptions to the Law of Demand. ... TheLaw of Demandstates that the quantity demanded for a good or service rises as the price falls, ceteris paribus (or with all other things being equal)...</p> | |