by The Law of demand asserts that, all else being equal, as the price of a good or service rises, the quantity demanded typically decreases, and as the price falls, the quantity demanded increases. While this law is generally valid in most market situations, there are certain exceptions where the demand curve does not follow this standard behavior.
1. Giffen Goods
Giffen goods are a class of inferior goods that do not follow the law of demand. These goods typically see an increase in quantity demanded as their price rises and a decrease in quantity demanded when their price falls. This counter-intuitive phenomenon occurs because the income effect outweighs the substitution effect. Giffen goods are usually staple items that make up a large portion of the consumer’s budget, such as bread or rice in impoverished regions.
When the price of a Giffen good rises, consumers’ real income effectively decreases, causing them to buy more of the good despite its higher price, because they can no longer afford the more expensive alternatives. A classic example is the situation in some developing countries where, if the price of rice rises, poor consumers may cut back on other foods but buy more rice because it is still their most affordable option.
2. Veblen Goods
Veblen goods are a category of goods for which demand increases as the price rises, contradicting the law of demand. These are typically luxury goods or status-symbol items, such as designer clothing, high-end cars, or expensive watches. The higher price of these goods actually makes them more desirable because consumers perceive them as exclusive, prestigious, or a status symbol. The desire to signal wealth and status to others causes demand to rise when the price increases. Essentially, consumers view these goods as more valuable because they are expensive, which is why the law of demand does not hold in this case.
For example, as the price of a luxury brand like Rolex increases, some consumers might perceive the watch as more prestigious and, therefore, may desire it more, increasing the quantity demanded.
3. Speculative Bubbles
In certain markets, particularly in asset markets like real estate, stocks, or commodities, the law of demand may not apply due to speculative bubbles. A speculative bubble occurs when the price of an asset rises due to excessive demand driven by the belief that prices will continue to rise in the future. In such cases, an increase in price may actually lead to an increase in demand, as consumers or investors expect to profit from future price increases. People are willing to buy at higher prices with the expectation of selling at even higher prices later.
For example, during a housing bubble, rising home prices may cause more buyers to enter the market, as they believe the prices will continue to climb, and they want to secure a home before they become even more expensive.
4. Essential Goods (Necessities)
For essential goods or necessities, such as basic food items, healthcare, and utilities, the law of demand may not hold strongly, particularly for low-income consumers. When the price of these goods rises, consumers might not reduce their quantity demanded as expected because these goods are vital for survival. As these goods are non-substitutable and necessary for day-to-day living, consumers may continue to purchase them, even at higher prices, to meet their basic needs.
For example, if the price of basic medications increases, people with chronic conditions may still buy the medicine because it is necessary for their health, leading to inelastic demand, where the quantity demanded doesn’t change much with price fluctuations.
5. Price Expectations
In certain circumstances, future price expectations can cause an increase in demand when prices rise. If consumers expect that prices will increase further in the future, they may choose to purchase more of a good or service now, even if the price has already increased. This is particularly common with durable goods like cars or electronics. The expectation of future price hikes leads consumers to buy more at current prices to avoid higher costs later, thereby causing an increase in demand.
For instance, if a consumer expects gasoline prices to rise sharply in the near future, they might fill up their tanks even if the price has already increased, leading to higher demand at the higher price.
6. Dynamic Pricing and Popularity
In some markets, particularly those involving dynamic pricing, demand might increase when the price increases due to a boost in the perceived value of the product. This is often the case with concert tickets, airline tickets, or hotel bookings, where prices increase as the event or service gets closer. Higher prices in these cases may increase demand, as consumers perceive the product or event as being more exclusive or in limited supply.
For example, tickets for a popular concert may become more expensive as the date approaches, and this increase in price could actually spur demand as consumers want to secure tickets before they are sold out.
7. Psychological Pricing
Psychological pricing is another factor where demand may increase despite higher prices. This happens when products are priced in a way that creates a perception of greater value, such as pricing an item at $9.99 instead of $10. This small price difference can make the product seem like a better deal, encouraging consumers to buy more, even though the price has increased slightly. This behavior exploits consumer psychology and is often used in retail and marketing strategies.
