The following points highlight the six exceptions to the law of demand. The exceptions are: 1. Things of Prestige Value 2. Inferior or Giffen Goods 3. Complementary Goods 4. Speculative Demand 5. Using Price as an Index of Quality 6. Highly Essential Goods.
Exception # 1. Things of Prestige Value:
Often rich people use very high-priced goods, not out of necessity but for their prestige value. Such goods confer distinction to their users. The high prices of such goods have status value. Hence, the higher the price the more will be the prestige value and higher the demand. Examples of such goods are diamond, costly dresses, expensive perfumes, costly cars, stones and jewellery etc.
Such goods are bought by the rich, not for their intrinsic worth but for displaying their riches. Such goods are purchased in large quantities at even higher prices by these people just to show that they can afford this i.e. goods. On the other hand, when the prices are low they lose their appeal to rich people who buy less. Such goods are called items of conspicuous consumption or Veblen (named after T. Veblen) goods and in such cases consumers measure the quality or desirability of a thing entirely by its price.
Exception # 2. Inferior or Giffen Goods:
The law of demand does not operate in case of a special type of goods known as inferior goods or Giffen goods. Such goods denote those which are bought in large amount when their prices are high and a small amount when their prices are low.
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The distinguishing features of these goods are:
(i) People spend a large part of their income for such goods;
(ii) Their income effect is negative; and,
(iii) Negative income effect exceeds the substitution effect.
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In effect, price and demand move in the same direction. In fact, Sir Robert Giffen found that poor people in Ireland used more potato and less meat when the price of potato rose high but that of meat remained the same. In truth, most Irish people in 19th century were so poor that they were compelled to buy more bread and potatoes even though their prices increased, to fill up the resulting gap of the expensive food like meat.
On the other hand, when the prices of bread and potatoes fell, they bought less of these goods to make their diet more varied and enjoyable. In this illustration, bread and potatoes are inferior or Giffen goods and the law of demand is not applicable here. In view of apparently contradictory nature of the phenomena it is known as the Giffen Paradox — a theoretical enigma to Marshall and his followers.
Exception # 3. Complementary Goods:
When the use of one good automatically requires the use of another good they are known as complementary goods, e.g., pen and ink, boot and boot polish, etc. If the price of pen or shoe is very high then a fall in the price of ink or boot polish will lead to a fall in their demand. People often sell their cars when price of petrol increases.
Exception # 4. Speculative Demand:
If people speculate a further rise in price following a rise in current price, they may try to purchase a large amount as quickly as possible despite the rise in price. Similarly, it is found that people buy the shares of companies in large numbers even when their prices are rising, and in smaller number even when their prices are falling. They do so in anticipation of a further rise or a further fall in prices in future. In case of such speculative transactions, the law of demand does not operate.
Exception # 5. Using Price as an Index of Quality:
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Some people consider high price as an index of better quality and demand more of high-priced goods. On the other hand, when price falls they buy less feeling quality deterioration. Most consumers do not have the capacity or technical knowledge to examine the physical properties of a product (such as reliability, durability, fuel economy, etc.) as in case of an item like 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 commodities having snob appeal, called prestige goods.
Exception # 6. 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 Sorbitrate 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.
Conclusion:
In such exceptional cases, the demand curve slopes upwards from left to right. But, such demand curves are hardly found in real life markets. It is most likely that any demand curve slopes upwards over a short range and then slopes downwards again, depending on the relative strength of income effect and substitution effect.