Q1. Which of the following is NOT an exception to the 'Law of Demand'?
- (a) Giffen goods
- (b) Conspicuous goods
- (c) Speculative goods
- (d) Substitute goods
Answer & solution
Answer: (d) Substitute goods
The Law of Demand states that as price rises, quantity demanded falls (inverse relationship). Exceptions are goods where demand rises with price. Substitute goods (e.g., tea and coffee) are NOT an exception — they follow the law normally: if the price of tea rises, demand for tea falls and demand for its substitute (coffee) rises. They do not violate the law of demand for the individual good.
Option 1 (Giffen goods): A Giffen good is an exception — as price rises, demand also rises (e.g., bread for the very poor who must buy even more when price rises). Named after Sir Robert Giffen.
Option 2 (Conspicuous goods/Veblen goods): Goods consumed to display wealth/status (luxury items). As price rises, their demand increases (a higher price signals higher status).
Option 3 (Speculative goods): When prices of certain goods (e.g., gold, stock) rise, buyers may purchase more expecting further price rises — violating the law of demand.