Explain using practical examples any two exceptions to the low of demand 5 pages
1. Veblen goods:
Veblen goods are a type of exception to the law of demand where the price of a good increases, but its demand also increases. This phenomenon goes against the basic economic principle that as the price of a good increases, the quantity demanded decreases. Veblen goods are seen as status symbols and individuals purchase them not for their utility or value, but rather for their perceived prestige or exclusivity.
One practical example of a Veblen good is luxury designer handbags. As the price of these handbags increases, demand for them also increases. Consumers are willing to pay a premium for these handbags because they are seen as a status symbol and are associated with prestige and luxury. The higher the price of the handbag, the more desirable it becomes for some consumers, leading to an increase in demand.
Another example of a Veblen good is high-end luxury cars. As the price of luxury cars increases, demand for them also increases. Consumers are willing to pay a premium for these cars because they are seen as a symbol of wealth and success. The higher the price of the car, the more desirable it becomes for some consumers, leading to an increase in demand.
In both of these examples, the law of demand is violated because as the price of these Veblen goods increases, the demand for them also increases. This is due to the fact that consumers derive satisfaction not from the utility of the good itself, but rather from the status or prestige associated with owning it.
2. Giffen goods:
Another exception to the law of demand is Giffen goods. Giffen goods are goods for which the demand increases as the price increases, and decreases as the price decreases. This phenomenon goes against the law of demand, which states that as the price of a good increases, the quantity demanded decreases, and vice versa.
One practical example of a Giffen good is staple foods such as rice or bread in countries where a large portion of the population lives in poverty. In these situations, when the price of rice or bread increases, the poorest individuals may actually increase their consumption of these goods, despite the fact that the price has gone up. This is because these individuals are already spending a significant portion of their income on these staple foods, and as the price increases, they have even less income available to spend on other goods. In order to make up for the decrease in purchasing power, they may choose to consume even more of these staple foods, leading to an increase in demand.
Another example of a Giffen good is low-cost generic products. In some cases, when the price of these products decreases, consumers perceive them as being of lower quality and may actually decrease their consumption of them. This is because consumers may associate higher prices with higher quality, and when the price of a generic product decreases significantly, they may perceive it as being inferior. As a result, demand for these products may decrease as the price decreases, going against the law of demand.
In conclusion, Veblen goods and Giffen goods are two examples of exceptions to the law of demand. Veblen goods violate the law of demand by increasing in demand as the price increases, while Giffen goods violate the law of demand by increasing in demand as the price increases and decreasing in demand as the price decreases. These exceptions highlight the complexity of consumer behavior and demonstrate that economic principles may not always apply in every situation.