question_answer

What will be the effect of following changes on the demand for a commodity? Explain with diagram.

(i) A fall in the price of substitute goods

(ii) A fall in the income of its buyer.

Or Explain any six exceptions to the law of demand.

Answer:

(i) Demand for a commodity will decrease when there is a fall in the price of substitute goods, implying that demand curve would shift backwards. Less will be purchased at the same price. Demand for commodity falls from OQ to\[O{{Q}_{1}}\]So, fall in the price of one substitute will cause demand for other substitute to fall. The given figure illustrates this situation:                                                    Quantity demanded (units) (ii) Demand for a commodity will decrease when there is a fall in the income of the consumer (assuming that the commodity demanded is a normal good). Less will be purchased at the same price. Demand curve would shift backwards i.e. demand for commodity falls from OQ to\[O{{Q}_{1}}\]. So, decrease in consumer?s income will cause his demand for pure ghee to fall.                                       The given figure illustrates this situation Quantity demanded (units) Exceptions to the law of demand are:                                                        (i) Giffen Goods Giffen goods are highly inferior goods, showing a very high negative income effect result, when their prices fall, demand also falls and vice-versa. This is known as ?Giffen Paradox?. (ii) Conspicuous Consumption These are known as Veblen goods. These goods are demanded only because their prices are very high. If their prices fall, they will be no longer considered as? article of distinction? and their demand will shrink e.g. demand for diamonds. (iii) Conspicuous Necessities Goods which are necessity in modern life defy law of demand as consumers have to purchase those goods in spite of their price, e.g. television sets.                     (iv) Necessities The law of demand does not hold true for necessities of life such as salt, medicines, etc. They maintain a constant demand, irrespective of their price.            (v) Ignorance Effect Sometimes, consumers are not aware of the competitive price of commodity, then they may purchase more of commodity even at higher price. So, law of demand is not followed here. (vi) Future Expectations In certain circumstances, when price of a good is falling, consumer may expect to fall it further and may not purchase at current falling price. This process defies law of demand.