There are different definitions of the law of demand in economics. The most common definition, which is adapted to fit macroeconomic models, shows an inverse correlation between the price and quantity demanded of a good. There are some real-world exceptions to the model-based definition, but these same exceptions do not apply to the more specific, logically deductive law of demand.
- In Econ 101 we are all taught that prices and quantities of goods in the market reach an equilibrium point based on their supply and demand.
- This 'law' states that as demand increases for a given supply, the price will rise; and as demand falls, prices fall.
- Likewise, as supply rises given the same demand, prices will fall; and vice versa.
- Some products, however, have been identified as violating the rules of supply and demand. We discuss some of these here.
Exceptions to the Law of Demand Model
The basic supply and demand chart in microeconomics shows price on the vertical axis, quantity demanded on the horizontal axis and a downward sloping demand curve. The supply curve is upward sloping and intersects the demand curve at equilibrium. However, not all markets fit this model in reality. Some goods see demand rise and fall with the price in a positively correlated relationship. This normally occurs with goods that have no close substitutes. Economists call some of these Giffen goods and others Veblen goods.
Giffen goods imply an upward sloping demand curve in a model. Historically, economists have only been able to point to one or two instances of goods that behaved like Giffen goods, such as rice in certain provinces in China or potatoes in 19th-century Ireland. Even these are considered controversial.
Most colloquial examples of Giffen goods are actually Veblen goods, which result from changes in consumer taste. Veblen goods actually have downward-sloping demand curves; the demand curve shifts to the right. Not all economists define this as a violation of the law of demand, however.
Another group of outliers are so-called Veblen Goods, named after the economist Thorstein Veblen. A veblen good is a one for which demand increases as the price increases, because of its exclusive nature and appeal as a status symbol. A Veblen good has an upward-sloping demand curve, which runs counter to the typical downward-sloping curve. However, a Veblen good is generally a high-quality, coveted product, in contrast to a Giffen good, which is often an inferior product that does not have easily available substitutes.
Deductive Law of Demand
The more expansive version of the law of demand cannot be plotted on a microeconomics price chart. There are no exceptions to this law of demand; its rules follow from syllogisms, or deductive logic, based on human action. A simplified description of this law is: as the true cost of acquiring a good increases, consumers tend to purchase less of it than they would have otherwise purchased.
The true cost of acquiring a good includes the opportunity cost. Even if the demand of a good, such as gold, increases as cost increases, its relative opportunity cost actually decreases.