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EXCEPTION TO LAW OF DEMAND - EXAMPLES AND MCQS

The Law of Demand generally states that as the price of a good or service decreases, the quantity demanded increases, and vice versa. However, there are some situations where this law may not hold true, and these are known as exceptions to the Law of Demand. Here are a few common exceptions explained in simple terms:

 

**1. Giffen Goods:

Explanation: Giffen goods are rare and occur when a good is considered inferior, and as its price increases, people buy more of it. This is because the income effect (the decrease in real income when prices rise) outweighs the substitution effect (the tendency to switch to alternatives when prices rise).

Example: In some cases, if the price of a very basic and staple food item like rice rises, people might buy more of it, even though there are other alternatives, because they can't afford the more expensive options.


2. Veblen Goods:

Explanation: Veblen goods are luxury items for which demand increases as the price increases. The higher price is seen as a status symbol, and people desire the good more.

Example: Designer handbags, luxury cars, or expensive jewelry might become more attractive as their prices rise because people associate them with higher status.


3. Necessities and Essential Goods:

Explanation: For some essential goods or basic necessities, demand may not always follow the typical pattern. Even if the price increases, people may still need to buy them, but they might have to cut down on other things.

Example: If the price of life-saving medication rises, people might cut spending on other non-essential items to afford the medicine.


4. Speculative Demand:

Explanation: At times people may anticipate that the price of a good will rise in the future, leading to an increase in demand even if the current price is high.

Example: If there's an expectation that the price of a particular stock will increase, investors might buy more of it now, even at a higher price, expecting to sell it later at a profit.


5. Emergency or Crisis Situations:

Explanation: In emergencies or crises, people's buying patterns may not follow the typical law of demand as immediate needs take precedence over price considerations.

Example: In the face of a natural disaster, people might buy more essential items, like bottled water or canned food, even at higher prices, because their immediate need for survival is more critical.


Remember, these exceptions are not as common as the regular application of the Law of Demand, but they help illustrate situations where the usual relationship between price and quantity demanded may not hold true.

 

1. What is a Giffen good?

 

A. A luxury item with increasing demand as price rises.

B. An inferior good with decreasing demand as price rises.

C. A normal good with stable demand.

D. A substitute good with increasing demand as price rises.

Answer: B

 

2. When does the Law of Demand not apply to Veblen goods?

 

A. When the price increases, demand increases.

B. When the price increases, demand decreases.

C. When the price decreases, demand increases.

D. When the price is stable, demand fluctuates.

Answer: A

 

3. What is the characteristic of necessities and essential goods as exceptions to the Law of Demand?

 

A. Demand decreases as price increases.

B. Demand increases as price increases.

C. Demand remains constant regardless of price.

D. Demand is unpredictable.

Answer: C

 

4. In the case of Giffen goods, what effect outweighs the other, leading to an increase in demand as price rises?

 

A. Income effect

B. Substitution effect

C. Price effect

D. Quantity effect

Answer: A

 

5. How do Veblen goods behave in terms of demand and price?

 

A. Demand increases as price increases.

B. Demand decreases as price increases.

C. Demand remains constant regardless of price.

D. Demand is inversely proportional to price.

Answer: A

 

6. What factor might lead to an increase in demand for a good even if its price is currently high?

 

A. Substitution effect

B. Income effect

C. Speculative demand

D. Normal demand

Answer: C

 

7. In emergencies or crisis situations, how might people's buying patterns differ from the Law of Demand?

 

A. Demand decreases as price decreases.

B. Demand increases as price decreases.

C. Demand is unaffected by price changes.

D. Demand increases even if prices are high.

Answer: D

 

8. How does a Giffen good behave in terms of demand and income?

 

A. Demand increases as income increases.

B. Demand decreases as income decreases.

C. Demand is unaffected by changes in income.

D. Demand increases as income decreases.

Answer: D

 

9. What is a key characteristic of necessities and essential goods in relation to the Law of Demand?

 

A. Demand is perfectly elastic.

B. Demand is perfectly inelastic.

C. Demand is relatively elastic.

D. Demand is relatively inelastic.

Answer: B

 

10. In what scenario might the Law of Demand not hold true for Veblen goods?

 

A. During a recession.

B. In a competitive market.

C. In a luxury goods market.

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