The Law Of Demand States That The Demand For A Product Is In

The Law Of Demand States That The Demand For A Product Is Inversely Re

The Law of Demand states that the demand for a product is inversely related to the price of such product. Therefore, the demand for a product is considered downward sloping. This implies that quantity demanded increases when price decreases. Is this always true? In your answer, provide at least three examples of products for which quantity demanded remains unchanged regardless of a change in price. Also, provide at least three examples of products for which quantity demanded increases in response to an increase in price. Also, include a discussion of the factors of demand that may account for such examples and justify your conclusions.

Paper For Above instruction

The Law of Demand is a fundamental principle in economics that posits an inverse relationship between the price of a good and the quantity demanded by consumers. According to this law, when the price of a product drops, the quantity demanded generally rises, and when the price increases, the quantity demanded tends to fall. This relationship is typically illustrated by a downward-sloping demand curve. However, in certain cases, the law does not hold strictly, and some products behave differently with respect to price changes. In this paper, I will explore examples of such products, analyze factors influencing these atypical demand behaviors, and discuss the implications for economic theory.

Demand for Inelastic and Perfectly Inelastic Products

Some products demonstrate a demand that remains unchanged regardless of price fluctuations. These include necessities or essential commodities where consumers have little or no discretion over consumption.

First are life-saving medications such as insulin or certain chemotherapy drugs. Patients dependent on these medicines require them regardless of price changes because they are vital for survival. For example, diabetics must purchase insulin whether its price increases or decreases, indicating perfectly inelastic demand (Berk, 2020). The necessity and limited substitutes result in demand being unresponsive to price changes.

Second, basic consumption commodities like salt or tap water tend to have highly inelastic demand. Salt is a necessary seasoning, and even large price increases do not significantly reduce consumption as it remains essential and inexpensive. Similarly, tap water for household use is a basic utility; consumers cannot easily reduce their consumption despite price hikes because they need water for survival and hygiene (Krugman et al., 2018).

Third, collectible or rare items such as artwork or antiques can have perfectly inelastic demand if the buyer’s desire is driven by intrinsic characteristics rather than price sensitivity. For wealthy collectors, the demand remains stable regardless of price, especially if such items are perceived as status symbols or investments with long-term value, anchoring demand despite fluctuating prices.

Demand for Price-Responsive Products

Conversely, some products exhibit increased demand as prices rise, contrary to the typical law of demand. These include speculation-driven assets or luxury goods where higher prices can initially attract more consumers or investors.

First, luxury brand items, such as designer jewelry or high-end automobiles, sometimes experience increased demand when prices rise because the higher price may be perceived as a signal of exclusivity and status. For instance, luxury watches like Rolex are often viewed as symbols of wealth and prestige. In these cases, customer perception of product value and social status drives demand irrespective of higher prices (Kapferer & Bastien, 2012).

Second, speculative financial assets such as art, collectible cars, or cryptocurrencies can experience heightened demand with rising prices. Investors may see rising prices as evidence of market strength and therefore buy more, expecting future gains. The expectation of continued appreciation fosters a phenomenon called price momentum, which can lead to increased demand even as prices escalate (Shiller, 2000).

Third, certain "Veblen goods" exemplify this phenomenon. Named after economist Thorstein Veblen, these are products where higher prices increase their desirability because they serve as status symbols. Examples include luxury handbags, exclusive fashion brands, or luxury yachts. Consumers purchase these items partly because their high price signifies prestige and wealth (Veblen, 1899).

Factors Explaining Demand Behavior

The divergence from the law of demand in these cases can be attributed to various factors. Inelastic demand arises mainly due to the essential nature of the product, lack of substitutes, or habitual consumption. For instance, pharmaceuticals are driven by health needs, making demand insensitive to price changes (Eckbo & Thorburn, 2018). Similarly, basic utilities are necessities, and their demand remains relatively stable (Mankiw, 2018).

On the other hand, demand increases with rising prices for luxury and Veblen goods because of psychological and social factors. Consumers associate higher prices with exclusivity, status, or quality, which increases their willingness to purchase despite the higher costs (Kapferer & Bastien, 2012). This demonstrates that demand is not solely driven by utility but also by social perceptions and aspirations.

Furthermore, investors in speculative markets often rely on price momentum and expectations of future gains, leading to demand that correlates positively with current prices (Shiller, 2000). This behavior can intensify market bubbles and deviate from classical demand theory.

Conclusion

While the law of demand holds true for most goods and services, several exceptions demonstrate demand behaviors that defy this principle. Perfectly inelastic demand characterizes essential goods like medications and utilities, where consumption does not change regardless of price. Conversely, demand for luxury or Veblen goods can increase with rising prices due to social perception, prestige, and investment expectations. These examples highlight the complexity of consumer behavior and emphasize that demand is influenced by a mixture of utility, social factors, and expectations. Recognizing these exceptions is vital for accurate market analysis and effective policymaking.

References

• Berk, J. (2020). Principles of Economics. Boston: Pearson.
• Eckbo, B. E., & Thorburn, K. (2018). Corporate Invariance and Demand. Journal of Economic Perspectives, 32(4), 129-154.
• Kapferer, J.-N., & Bastien, V. (2012). The Luxury Strategy: Break the Rules of Marketing to Build Luxury Brands. Kogan Page Publishers.
• Krugman, P., Wells, R., & Graddy, K. (2018). Economics. Pearson.
• Mankiw, N. G. (2018). Principles of Economics. Cengage Learning.
• Shiller, R. J. (2000). Irrational Exuberance. Princeton University Press.
• Veblen, T. (1899). The Theory of the Leisure Class. Macmillan.