Demand function explains the relationship between demand of a commodity and the various factors influencing it. In other words, demand function explains the relationship between demand and its various determinants. At a time the quantity demanded of 3 commodities depends on the following four factors;
(i) Price of the commodity:
Generally, a decline in price leads to increase the demand and an increase in the price leads to a decline in the demand.
(ii) Income of the consumer:
Generally, on the same price, the demand for a commodity goes up when the income of the consumer increases and its demand goes down when the income of the consumer declines.
(iii) Price of other commodities:
Other things remaining the same, the demand for a commodity depends on the prices of substitute and complementary goods.
(iv) Tastes and habits of the consumer:
Non-economic factors like fashion and tastes and habit of the consumer also affect the demand for a commodity.
Exceptions to the Law of Demand
Law of demand is not applicable in all the cases. In the following cases, a decline in price does not lead to an increase in the demand and an increase in the price does not lead to a decline in the demand.
1. Inferior goods:
The demand for inferior goods decreases with the decline in their price and vice-versa. This paradox is known as Giffin paradox because Giffin was the first economist to draw attention towards this paradox. According to Giffin, the demand for certain inferior goods declines with the decline in their price and their demand goes up with the increase in their price. Such commodities are known as Giffin goods.
However, all the inferior goods are not an exception to the law of demand or all inferior goods are not Giffin goods. All those commodities are inferior commodities whose income effect is negative. However, the law of demand docs not apply only to those inferior goods whose positive substitution effect is less than the negative income effect. Such goods are known as Giffin goods. The law of demand applies to those inferior commodities whose substitution effect is stronger than the negative income effect.
2. Expectations of changes in the price in future:
The slope of a demand curve depends on the fact as to whether the price of a commodity is expected to increase or decrease in the near future. When a consumer expects that the price of a commodity is to increase in the future, he starts demanding more of it at the current price. On the other hand, if he expects that the price of the commodity is likely to decline in the near future, he does not buy at the current price and postpones his demand for the future. As a result of this, the demand curve rises upwards to the right,
Many a time a commodity is demanded not because of its intrinsic qualities, but because of its being costly or scarce. There are many commodities which only rich people demand because this enhances their status. Decline in the prices of such commodities reduces their status value and hence, their demand goes down. Rare and costly goods have snobbery appeal.
The demand for such goods which are in fashion does not decline even when their price goes up. On the other hand, if the fashion of commodity disappears, a decline in its price shall not lead to an increase in its demand.
5. Possibility of war:
If there is any possibility of breaking out a war in the near future, consumers start buying more of the goods without carrying for the current price because they know that during war day’s goods of civilian consumption would not be available or if available, would be at a very high price. Indians have a vast experience of this phenomenon during the days of Chinese and Pakistanis aggressions.
Sometimes people buy more of a commodity at higher prices simply due to their ignorance.
From the study of above exceptions, it is clear that in the case of an exception, demand curve will rise upwards to the right. In other words, the slope of demand curve will be positive.