Understanding Exceptions to the Law of Demand in Microeconomics

So far, you have learnt about demand and its determinants. Now, the law of demand states that everything else being equal, with an increase in the price of a good, its demand will decrease, and vice versa. 

We have assumed that this holds true for all goods.  
 

But read this article on theupsider.com. It illustrates some of the most expensive vintage cars that are sold at auctions. The most expensive car on this list is a 1962 Ferrari 250 GTO. A probable reason why these cars of an older period are so expensive (probably even costlier than their original factory price) is that they are exclusive and are attached with some historical importance.

Now, moving ahead, in the upcoming video, you will learn how certain goods, such as vintage cars, are exceptions to the law of demand. 

So, in the video, you learnt about the following two types of goods:

1. Veblen goods: The demand for Veblen goods rises as their price increases. Through the examples of diamonds and wine, you learnt how the price of a product is often perceived to be related directly to its quality.
   
   
   As seen in the diagram above The curve has properties of a normal demand curve at low prices, but above a certain price (illustrated by yellow point) the goods start to display ‘snob value’, and so the demand curve starts sloping upwards. 

2. Giffen goods: The demand for Giffen goods decreases as their price decreases.
   
   
   As seen in the diagram above, at high prices, Giffen goods display a normal downward slope assuming that this is the only good consumed. When the prices drop to a certain point, (illustrated by yellow point), a decrease in price will decrease the quantity demanded, and vice versa.

Additional Learning

• The following paper on Giffen Behavior: Theory and Evidence, by Robert T. Jensen and Nolan H. Miller, provides real-world evidence for Giffen behaviour. 
• You can go to this link to understand why the value of a supercar, Ford GT, is increasing even after being sold to consumers.
• You can refer to this interesting article will be helpful better understand Giffen goods.