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Unit 2: Demand Analysis

2.3 Exceptions to Law of Demand Notes

There are a few exceptions to the law of demand. Some goods behave differently and defy the
law.
Case of inferior goods: Low quality rice, bajra, second hand goods etc. are all considered as
inferior goods whereas basmati rice, branded clothes, watches etc. are all considered as normal
goods. When an increase in income leads to an increased consumption of a good, it is called
a normal good or superior good. But when an increased in income of buyers leads to a fall
in the consumption of a good it is called an inferior Good. Inferior goods have preferred but
more expensive substitutes. With rise in income, consumers can afford more of the expensive
substitutes, e.g., ordinary bread, costly soaps and perfumes to ordinary ones.
Case of giffen goods: The concept of Giffen goods will be clear after going through the following
example: It was observed that British workers bought more bread even when there was a rise in
its price. This phenomenon was observed by Robert Giffen in the 19th century and is called the
Giffen’s paradox. Bread was the main diet of the poor labourers when the price of bread rose,
it affected the resources of these families. They curtailed the consumption of costlier products
like meat and increased the consumption of bread. After all even after price rice, bread was till
cheaper than meat. This phenomenon shows a perverse demand relation. A Giffen good is an
extreme type of inferior good. When the price of a Giffen good rises, consumers actually buy
more of that good.
In the Giffen good situation, cheaper close substitutes are not available. Because of the lack of
substitutes, the income effect dominates, leading people to buy more of the good, even as its price
rises.
Case of Veblen goods: Expensive perfumes, designer clothes, imported cars etc. fall in category of
Veblen goods. Veblen goods are goods for which people’s preference for buying them increases
with the increase in the prices of those goods. This happens because a greater price confers greater
status. So when price of such goods increase their demand also goes up, instead of decreasing.
This concept is referred to as the Veblen effect, named after the economist Thorstein Veblen,

who first pointed out the concepts of conspicuous (easily noticeable and attracting attention )
consumption and status-seeking.
Some types of high-status goods, such as exclusive watches, designer handbags and luxury cars,
are Veblen goods, because a decrease in their prices decreases people’s preference for buying
them because they are no longer perceived as exclusive or high status products.

Task Find out some more practical examples from your day to day life, where you
see law of demand being violated.

2.4 Shift and Movement of Demand Curve

Theoretically, we will see that the basic of law demand has a role to play in shift and movement
in demand curve.
If any of the components held constant in drawing a demand curve change, there is a shift in the
demand curve. It is of two types:
1. Increase in Demand: The demand curve shifts upward or to the right, so that the individual
demands more of the commodity at each commodity price if the price of a substitute
commodity increases or the price of a complimentary commodity falls, and if the consumer’s
taste for the commodity changes. This is shown in Figure 2.1.

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