The Law of Demand states that there is an inverse relationship between Price and Quantity demanded, other factors remaining constant. A fall in price of a good leads to a rise in its quantity demanded and a rise in the price of a good leads to a decrease in its quantity demanded.
However, there may be some cases where the law of demand doesn’t hold i.e when a decrease in price doesn’t result in an increase in quantity demanded and an increase in price doesn’t result in a fall in quantity demanded. In other words, we can say that the demand curve is not downward sloping. It may be an upward sloping curve, which means with a rise in price, quantity demanded also rises and a fall in price results into a fall in quantity demanded, other factors remaining the same.
So, what are those cases, also known as exceptions to the demand curve:
1. Veblen Goods
Named after an American economist Thorstein Veblen, Veblen
goods are certain type of luxury goods which do not obey the law of demand. These
are goods which add to the social status of a consumer and the consumer buys such goods to attain a certain distinct status in the society. Some examples can be luxury
watches, vintage cars, paintings by famous artists, private yacht, rare gems etc.
People buy more of these goods when their prices are high rather than at lower
prices as owning these type of goods gives a certain distinct social status to
people.
The marketing of such goods is done in such a way so as to attract certain type of consumers, generally the very rich or affluent consumers. These goods may sometimes be very exclusive and thus, owning them sets a consumer apart from other consumers like paintings of famous artists. Therefore, these goods are demanded at a higher price.
If the price of these
goods rises, their demand rises, as people who buy such goods think buying
these goods at such a higher price will set them apart from others. If the
price of these type of goods falls, people assume these goods have now no
distinct value or exclusiveness, and hence their demand falls. However, still
these goods are pricey enough for the common consumer to buy them. Hence,
because of a fall in the price of Veblen goods, their demand by the common
consumers may not increase and demand by the affluent consumers fall leading to
a fall in quantity demand of Veblen goods.
2. Giffen Goods
Before understanding Giffen goods, we need to
understand what are inferior goods. Goods may be distinguished as normal goods
and inferior goods. Normal goods are those whose demand increases with a rise
in consumers' income and decrease with a decrease in income. Many of the goods
and services you buy fall in the category of normal goods such as clothes,
electronic items, eating at restaurants.
Inferior goods:
There are certain types goods which a consumer may value as inferior or of
lesser quality compared to the other goods. For such goods, the quantity
demanded falls with a rise in the consumers income and rises with a fall in
consumers income. This happens because when the income of a consumer rises,
he/she thinks with their rise in income they can consume or substitute a better
quality good compared to what they are consuming right now and hence, their
demand falls with a rise in income.
On the other hand, when the income of a consumer falls, now, they not only cannot afford the better quality good and but with their fall in income, are now more dependent on the low-quality good. Hence, with a fall in income, the quantity demanded rises. Some common examples of inferior goods are public transportation. With a rise in income of a consumer, he/she may want to buy his/her own car instead of going in public transportation, leading to a fall in its demand by the consumer.
It is
important to note that for a different set of consumers, the same good may fall
into the category both a normal good and an inferior good, as whether a good
will fall in the category of a normal good or inferior good also depends upon
the consumer’s current income and his/her social status. For some consumers a
small car may fall into the category of an inferior good, so that when the
income of the consumer increases, he/she may demand a bigger car.
Giffen Good:
The term ‘Giffen good’ was coined by a Scottish economist Sir Robert Giffen in
the 1800s. Giffen goods are highly inferior goods which do not follow the law
of demand i.e their quantity bought increases as their price increases and
quantity bought falls as their price falls.
Basically, Giffen goods are goods of very inferior
quality which people falling in the low-income group consume, and these goods
are the goods of last resort in the sense that there may hardly be any other substitute
available for these goods. So, if the price of these goods rise, the consumer
has no alternative but to buy these goods even at a higher price, and if the
price of these goods fall, the consumer shifts to other better quality goods,
leading to a fall in their quantity demanded. Coarse grains such as barley,
millet may fall under the category of Giffen goods, coarse cloth will also fall
under this category.
However, whether a good will fall under the category
of Giffen good will depend upon the income level of the consumer. In a
developed country like U.S.A wheat, rice and bread may be Giffen goods as these
are staple food items, and if their prices increase, consumers have no
alternatives but to rely on these staple food items, even with an increase in
price. On the other hand, in an underdeveloped country, other coarse grains
like barley, millet etc may be consumed by low-income groups and wheat, rice or
bread may be luxury items for them.
Taking an example of an underdeveloped economy, we assume a part of the population may be consuming inferior goods like barley, jowar compared to normal foodgrains like rice and wheat due to not having enough income to buy to buy the standard foodgrains. The price of the normal foodgrains is generally higher than the price of inferior grains. So, if the price of these goods falls, let’s say the price of barley falls from Rs 10 to Rs.5, this results in an increase in the real income of the consumers, which means they have an extra Rs.5 in their hands. With this increase in real income, the consumer will want to buy a better foodgrain like rice or wheat.
Therefore, when the price of Giffen goods fall, the real income in the hand of
the consumers increases and they shift to better alternatives. As a result, the
quantity demanded of these goods falls with a fall in price. On the other hand,
when the price of Giffen good rises, let’s say the price of barley rises from
Rs. 10 to Rs.15, then the consumer has no other option but to rely on these
goods for survival. Hence, the quantity demanded increases of the Giffen goods
with a rise in price of these goods, as there is no other substitute good
available.
Necessary Conditions for Giffen Goods
Giffen goods are a rarity and not a good can be categorized as a Giffen good only if it meets a few necessary conditions.
1. These are generally non-luxury goods or
inferior-goods consumed by low-income groups.
2. These goods must constitute a large proportion of a
consumers’ budget, so that a fall or rise in price of the good effects the
overall budget of the household.
3. These goods do not have substitutes in the same
price range so that it becomes difficult to replace the good even after a rise
in price. Even if the substitute good is available, it is priced at a higher
rate compared to Giffen goods, so that even after the rise in price of Giffen
good, the substitute good is still priced higher. Thus, making substitution not
possible.
Veblen Goods vs Giffen Goods
Both Veblen and Giffen goods do not obey the Law of
Demand in the sense that they have an upward sloping demand curve. With a rise
in the price their quantity demanded rises and a fall in price leads to a fall
in quantity demanded. However, Veblen goods are luxury goods consumed by very
high-income consumers whereas Giffen goods are non-luxury highly inferior goods
consumed by low-income groups.
Key Points
- In some cases, the law of demand doesn’t hold and we get an upward sloping demand curve, which means with a rise in price, quantity demanded also rises and a fall in price results into a fall in quantity demanded.
- Veblen goods are luxury goods which do not obey the law of demand. These goods are demanded more at higher prices ass compared to lower prices. The consumer buys such goods to attain a certain distinct status in the society.
- Some examples of Veblen goods can be luxury watches, vintage cars, paintings by famous artists, private yacht, rare gems etc.
- Giffen goods are highly inferior non-luxury goods which also do not follow the law of demand.
- Giffen goods do not have substitutes. So, if the price of these goods rise, the consumer has no alternative but to buy these goods even at a higher price, and if the price of these goods fall, the consumer shifts to other better quality goods, leading to a fall in their quantity demanded.
- Coarse grains such as barley, millet may fall under the category of Giffen goods, coarse cloth will also fall under this category.