State and explain the law of demand with its exceptions.

Answer: The law of demand states that, other things being constant, the quantity demanded of a commodity rises when its price falls and falls when its price rises.

Statement (Prof. Alfred Marshall): “Other things being equal, the higher the price, the lower the quantity demanded and the lower the price, the higher the quantity demanded.” There is an inverse relationship between price and quantity demanded: \(D = f(P)\).

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

Demand schedule:

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

Exceptions to the law of demand (where demand rises with a rise in price, i.e. the demand curve slopes upward):

1. Giffen’s paradox: for inferior goods consumed by poor people (e.g. coarse grain, bajra), a rise in price may increase demand because they cut down on superior goods and buy more of the inferior good.
2. Prestige goods (Veblen effect): rich people buy more of costly goods like diamonds and luxury cars when their prices rise, as they are status symbols.
3. Speculation: if people expect prices to rise further, they buy more even at a higher price (e.g. shares, gold).
4. Ignorance: consumers may think a higher-priced good is of better quality and buy more of it.
5. Habitual goods: demand for goods like tea, cigarettes, liquor may not fall when their price rises.
6. Necessities and emergencies: necessaries (salt, medicines) and goods needed in wars, floods etc. are bought in the same or larger quantities even at higher prices.

[Diagram: an upward sloping demand curve from left to right showing that in these exceptional cases quantity demanded rises with the rise in price.]