State and explain the law of demand with exceptions.

Answer: Other things remaining constant, the quantity demanded of a commodity varies inversely with its price.

Statement (Prof. Alfred Marshall): ‘Other things being equal, the higher the price of a commodity, the smaller is the quantity demanded and lower the price, larger the quantity demanded.’ Thus demand is a decreasing function of price: \(D_x = f(P_x)\).

Assumptions: no change in income of the consumer, tastes, habits and preferences, prices of substitutes and complementary goods, size of population, and no expectation of future price changes.

Demand schedule:

[Diagram: quantity demanded on the X-axis and price on the Y-axis; plotting the schedule gives the demand curve DD sloping downward from left to right, showing the inverse relation between price and quantity demanded.]

Exceptions to the law of demand (cases where more is bought at a higher price, so the demand curve slopes upward):

1. Giffen’s paradox: Sir Robert Giffen observed that when the price of bread (an inferior good) rose, poor workers bought more bread and less meat, as they could no longer afford meat.
2. Prestige goods (Veblen effect): Diamonds, expensive cars and jewellery are bought by the rich as status symbols; they buy more when prices are higher.
3. Speculation: When people expect prices to rise further (e.g. shares, gold, essential goods during scarcity), they buy more even at a higher price.
4. Price illusion: Some consumers believe a high-priced good is of better quality and buy more of it.
5. Habitual goods: Addicts continue to buy goods such as tobacco or liquor even when prices rise.
6. Necessaries: Essential goods like medicines and salt are bought in the required quantity whatever the price.

Thus the law of demand is generally true, but it does not hold in the above exceptional cases.