EXCEPTIONS TO LAW OF DEMAND

Prof & Lawyer. 

Puttu Guru Prasad,M.Com. M.B.A., L.L.B., 

M.Phil. PGDFTM. 

AP.SET., ICFAI TMF., (PhD) at JNTUK.

Senior Faculty for Management Science,

S&H Department, VVIT, Nambur, NSS P.O

My Blog: puttuguru.blogspot.in93 94 96 98 98, 807 444 95 39,

DEMAND www.slideshare.com

Demand is desire/ want, backed by ability to pay. It is the amount of buyers who are willing to purchase the products and services at

a given price over a given period of time

LAW OF DEMAND

Ceteris paribus, the quantity of goods demanded at a particular price, at a particular point of time, varies inversely with its price.

Qd = f ( Px )

Demand for a commodity is the function of its price.

Source : Google images.

Exceptions

Goods that obey the law of demand are normal goods.

There are goods which doesn’t obey the law of demand

Such goods are either superior goods or inferior goods

Named as Veblen and Giffin goods respectively

VEBLEN GOODS

source:www.tutor2u.net

VEBLEN GOODS: Veblen goods are things primarily bought to show-off the wealth. Positional good. Veblen effect : Extent to which the demand for a consumer

product increases, owing to the fact that, it

bears a higher price than the other commodities. If the price decreases, then more people can

afford them and they become less effective as

an indicator of wealth, so demand falls. This phenomenon is snob effect: Extent to which

demand of a commodity is decreased, owing to

the fact that number of people are using the same

commodity

Ostentatious consumption

Examples are luxury items like perfumes, luxury cars, Designer clothes and handbags etc.

Satisfaction increases due to the possession of high priced good. The demand for the product is a direct function of its price.

Classic example - VI which is considered to be the most exclusive perfume in the world. Only 475 bottles have been produced and bottles have been selling for £47,500 each – a classic case of paying through the nose for an exclusive good.

have a high-income elasticity of demand. (demand rises more than proportionately to an increase in income.)

Income elasticity of Veblen goods.

Normal goods have a positive income elasticity of demand, (income rises, demand also rises.)

For example (luxury) a 8% increase in income might lead to a 16% rise in the demand for restaurant meals. The income elasticity of demand in this example +2.0. Demand is highly sensitive to (inc: or dec: in) income.

NORMAL GOODS

NecessitiesElasticity btw 0 and 1

Slower rate of inc:

Luxuries.Elasticity greater than 1

Faster rate of inc:

The World Gold Council - demand from Asia remains high for gold. The standout markets were India and China, (52% ).

due to increasing levels of economic prosperity,

forthcoming key gold purchasing festivals.

European sovereign debt crisis and the downgrading of US debt,

inflationary pressures, is driving of 'investment demand.

www.marketwatch.com Gold Prices

CARS

Owning a car was once a luxury. Now, nobody goes for brands that were once considered ‘luxury’

VANITY BAG

Concept of vanity bag is long gone now. Bags are not vanity bags anymore. They have given way to designer handbags.

WATCHES

Watches are becoming a status symbol than a utilitarian good. Even though the purpose of a watch is to show time, people purchase a

Rado or Rolex to show off their wealth.

Haute Couture

Haute couture dresses are very few in number

Hence very expensive.

Thus owning a designer clothing, is a

mark of prestige.

STATISTICS – 2011 www.bloomberg.com,www.online.wsj.com

8% rise :

Sales of luxury goods may rise 8 percent this year, matching 2010’s pace. in October a growth of 3 percent to 5 percent will be seen

Spending on luxury apparel, accessories, watches, jewellery, perfume etc may climb to 185 billion euros in 2011 from 172 billion euros last year.

15% inc - Asia-Pacific

Annual luxury sales in japan will decline to 17 billion euros from 18 billion euros, as it is only recovering from the recent calamities.

Mainland China will remain the fastest-growing market for luxury goods in 2011 as sales rise 25 percent to 11.5 billion euros, Bain predicted. The country is on course to become the world’s third-largest luxury market in five years.

Europe (7 %) and the Americas (8%)

Europe and the Americas, which together account for more than two-thirds of global luxury consumption

The U.S. is the largest market, accounting for 48.1 billion euros in 2010, according to Bain.

Lifestyle changes are driving sales increases in Russia and new stores will fuel growth in the Middle East and Brazil, Bain said.

By 2014, global luxury sales may rise to as much as 221 billion euros.

SUMMARY

When Price inc: demand dec:

Called Goods of conspicuous consumption.

Gives psychic satisfaction. not material satisfaction.

In case of some Veblen goods (paintings, antiquities etc.), supply is not controlled by demand.

in boom times, demand for luxury goods grow faster than the growth of economies (as measured by GDP).

slowdowns can cause sales to retreat rapidly, as consumers buy fewer high-priced luxury goods.

GIFFEN GOODS

www.buzzle.com

Giffen good is a good that which decreases in demand when consumer income rises.

Income elasticity is less than 0 Giffen goods can be categorized into three.

a. necessary staple goods

VICTORIAN SOCIETY

purchasing tendency of the poor Victorian subjects when the price of necessary staple goods such as bread, food grain,

vegetables, etc., rose, the poorer sections, concentrated all their purchasing power on procuring the necessary staples.

gave up on purchasing other goods This kept the demand for these good high despite an increase in their

price.

IRISH SOCIETY

people were so poor as the price of potatoes rose, they started substituting potatoes, a dietary staple, for meat and other unnecessary luxuries. The Irish consumed more potatoes as a result.

CHINESE SOCIETY they consume more rice or noodles, their staples, as prices go up. People need a certain amount of calories to survive that can be either got by

consuming rice and some vegetables alone, or by eating rice, vegetables and a few bites of meat.

But meat is expensive. Poor Chinese can no longer afford the luxury of cooking meat,

So they eat rice instead, which is still relatively cheap compared to meat. This is Giffen behaviour in action.

b. inferior goods those for which the demand rises when the price to procure them forms a relatively

substantial part of the buyer's income without eating into the amount of income set aside for the consumption of other regular items.

Cheaper cars are examples of the inferior goods. generally prefer cheaper cars when their income is constricted. As a income increases the demand of the cheap cars will decrease,

while demand of costly cars will increase, so cheap cars are inferior goods.

Inter-city bus service is also an example of an inferior good. This form of transportation is cheaper than air or rail travel.

When money is constricted, travelling by bus becomes more acceptable. but when money is more abundant than time, more rapid transport is preferred.

Inexpensive foods like hamburger, mass-market beer, frozen dinners, and canned goods.

As incomes rise, one tends to purchase more expensive, appealing and nutritious foods.

Some inferior goods are so consistent that they can be seen as economic indicators. One such example is instant noodles,

increase in the Thai "Mama Noodles Index" (the number of the popular Mama-brand instant noodles sold) in 2005,

seen as a sign of weakness.

c. experience goods

The utility and quality of certain goods and services can be observed and decided only after using those products or services.

In such cases, a drop in price is often interpreted as a drop in quality or utility of the product or service.

health and beauty care services.

Thanking you all

Professor & Lawyer. Puttu Guru Prasad,M.Com. M.B.A., L.L.B., M.Phil. PGDFTM. AP.SET., ICFAI TMF., (PhD) at JNTUK.

Senior Faculty for Management Studies, S&H Department, VVIT, Nambur,

NSS Program OfficerMy Blog: puttuguru.blogspot.in93 94 96 98 98, 807 444 95 39,