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Exceptions To The Law Of Demand

Exceptions to the Law of Demand

The law may not pertain to the following Situations. In the time of war, irrespective of prices, f ew commodities may be purchased and stored. During the depression, the price and demand are both less due to the deficiency of purchasing power of people. Due to the hike in price of certain consumer goods, people are forced to restrain its consumption and are likely to consumer cheapest products. In the case of underdeveloped economical status, with the decline in price of inferior commodities like maize, consumers will start consuming more of superior commodities like wheat. As a result the demand for maize will fall. This is what Marshall called the Giffen Paradox which makes the demand curve positive. If the consumers are affected by the principle of conspicuous consumption or demonstration effect, they are expected to buy more of those products which bestow distinction on the possessor, when their rise. On the other hand with the fall in the prices of such articles, their demand falls as is the case with diamonds. Customers may buy at a higher price in the event of ignorant effect such as deceptive packing and Labels.

Income Demand

Income demand indicates the relationship between income and quantity of commodity demanded. It relates to various quantities of a commodity or service that will be purchased by the customers at diverse levels of earnings in a set phase of moment, other things being equal. The demand for a commodity hikes with the hike in earnings and declines with the fall in earnings. For instance, let us construct the demand and income curves. When the income is OX, the demand is OY and when the income rises to OX1, the demand will be OY1. The reverse can also be shown likewise. Thus the income demand curve Z has a positive slope. But this is in the case of normal goods. In the case of inferior goods, so long the income remains below a particular level of his minimum subsistence, he will continue to buy more of these inferior goods even when his income increases by small increments. But when his income starts rising above that level, he reduces his demand for his inferior goods. These are explained in the diagrams below.

Cross Demand

In the case of related goods, the change in the price of one affects the demand of the other. This is termed as the Cross Demand. The function of cross demand is D = f(pr). Related goods are of two types, substitutes and complementary. In the case of substitutes a rise in the price of commodity X raises the demand for the other commodity Y, the price of Y remains the same. The opposite holds in the case of a fall in the price of X when demand for Y falls. If however, the two goods are independent, a change in the price of X will have no effect on the Y.

Short Run And Long Run Curves

In case of perishable goods, the change in the amount of demand effects the change in the price. The inclination curve is generally negative. But for durable goods, the change in price will not have its ultimate effect on the quantity demanded until the existing stock of the commodity is adjusted which may take a long time. A short run curve proves the change in amount demanded to a change in price, given the existing stock of the durable goods and the supplies of its surrogates. The long run demand curve shows the change in the quantity demanded to a change in price after all adjustments have been made in long run.

Defects of Utility Analysis or Demand Theory

According to Marshall there are certain defects which are dealt below.

  • The utility cannot be calculated fundamentally

  • The single commodity model is imaginary, since its practically incorrect

  • Money is an imperfect calculation of utility, this is an imperfect and erratic measuring pole of utility

  • The marginal utility of currency is not constant. The hypothesis of marginal utility of money remains constant which is far away from reality

  • Man is not said to be rational. The customer does not buy commodities rationally. This makes the utility examination a myth and unfeasible

  • The utility analysis does not swot up the swot of income effect, substitution effect and Price effect

  • It fails to clarify the swot of inferior and Giffen goods

  • The myth is the assumption of increase in demand when prices decline

  • This analysis be unsuccessful to describe the Demand for Indivisible goods such as Radios, transistors, old modelled scooters etc. Hence this analysis is not applicable to indivisible goods. These are the defects pertaining to utility analysis.

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