The following five points highlights the exceptions of the law of demand i.e., (1) Speculative Demand, (2) Snob Appeal, (3) Using Price as an Index of Quality, (4) Giffen Goods and (5) Highly Essential Goods.
1. Speculative Demand:
In a speculative market (such as the stock market) a rise in the price of a commodity (such as a share) creates the impression among the buyers that its price will rise further.
So people start buying more of the commodity when its price rises. This is not truly an exception to the law of demand in the sense that the demand curve here is not upward sloping.
Hence, there is no movement along it from left to right. In fact, in a speculative market we see a shift of a normal, downward sloping demand curve people buy more at the same price. Some economists wrongly refer to this as an exception because they get confused between two issues — movement along a demand curve and shift of the demand curve.
2. Snob Appeal:
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People sometimes buy certain commodities like diamonds at high prices not due to their intrinsic worth but for a different reason. The basic object is to display their riches to the other members of the community to which they themselves belong. This is known as snob appeal, which includes people to purchase items of conspicuous consumption.
This is a genuine exception to the law of demand. The demand curve for such an item will be upward sloping. Thus, if, for instance, the price of diamonds falls, people will buy less of it. In a word, purchasers value diamonds and other costly items because of their prices and because of the psychic satisfaction that they derive from it.
3. Using Price as an Index of Quality:
Most consumers do not have the capacity or technical knowledge to examine the physical properties of a product (such as reliability, durability, economy, etc.) as in case of an item such as a motor car or a VCR. So, in the absence of other information, price is taken as an index of quality. Thus a high priced car is more valued than a low priced one.
A costly book is often considered to be more useful by a student than a cheap title. In such cases the demand curve may be upward sloping. This argument is not a new one. This applies to our previous case where we referred to commodities having snob appeal. So this point really reinforce the previous one.
4. Giffen Goods:
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A ‘Giffen goods’ is a special variety of inferior goods. Sir Robert of Scotland observed in the 19th century that poor people spend the major proportion of their income on a staple food, viz., and potato. If the price of this good rises they will become so poor that they will be found to spend loss on other items and buy more potatoes in order to get a minimum diet and keep themselves alive. In such goods the demand curve will be upward sloping.
5. Highly Essential Goods:
Finally, in case of certain highly essential items such as life- saving drugs, people buy a fixed quantity at all possible prices. Heart patients will buy the same quantity of so bitrate whether price is high or low. Their response to price change is almost nil. In case of such commodities the demand curve is likely to be a vertical straight line.