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Managerial Economics

The document discusses several exceptions to the law of demand, including Veblen effects, bandwagon effects, and snob effects. It also explains why demand curves typically slope downward, including reasons like diminishing marginal utility, income effects from price changes, and substitution effects when goods become relatively cheaper. Factors like the size of the consumer group and different potential uses of a good can also influence demand.

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saniyaprashantk
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24 views21 pages

Managerial Economics

The document discusses several exceptions to the law of demand, including Veblen effects, bandwagon effects, and snob effects. It also explains why demand curves typically slope downward, including reasons like diminishing marginal utility, income effects from price changes, and substitution effects when goods become relatively cheaper. Factors like the size of the consumer group and different potential uses of a good can also influence demand.

Uploaded by

saniyaprashantk
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Factors Affecting the Law of Demand

Exceptions To The Law of


Demand
1. ARTICLE OF DISTINCTION (VEBLEN
EFFECT)

• The exception was first of all discussed


by Veblen. According to him, Articles of
distinction have more demand only if
their prices are sufficiently high. Eg:
diamonds, Jewellery, etc.
• It is so because the distinction is bestowed
on them by society because they are
costly.
• If their prices fall, they will no longer be
considered articles of distinction, so their
demand will decrease.
HIGHLY ESSENTIAL GOODS
EMERGENCIES
EMERGENCIES
BANDWAGON EFFECT /
DEMONSTRATION EFFECT

• This is the most common type of exception to


the law of demand wherein the consumer tries
to purchase those commodities which are
bought by his friends or relatives.
• Here the person tries to emulate the buying
behavior and patterns of the group to which he
belongs irrespective of the price of the
commodity.
• For example, if the majority of the group
members have smartphones, then the
consumer will also demand the smartphones
even if the prices are higher.
SNOB EFFECT

• When a product becomes common among all, some people


decrease or altogether stop its consumption.
• This is a called snob effect
Why more of a good is purchased
when its price falls ?
OR
Why does demand curve slope
downwards?
Law of Diminishing Marginal Utility
According to this law, as the consumption of a commodity increases, the utility from each successive
units goes on diminishing to a consumer. Accordingly for every additional unit to be purchased, the
consumer is willing to pay less. Thus more is purchased only when the price of a commodity falls.
The Income Effect
The income effect refers to a change in quantity
demanded when the real income of the buyer changes as
a result of a change in the price of the commodity.
Change in the price of a commodity causes a change in
the real income of the consumer.
With a fall in price, real income increases. Accordingly,
demand for the commodity expands.
Substitution Effect
Substitution refers to substituting one
commodity for the other when it becomes
relatively cheaper
Size of consumer group

When price of a commodity falls, it attracts new buyers who now


can afford to buy it.

Different Uses

Many goods have alternative uses. Milk for example, is used for
making curd, cheese, butter. If price of milk reduces its uses will
expand. Accordingly demand for milk expands

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