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Law of demand

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! Context !! Verbal explanation !! More about phenomena
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| Single household, single good (seen in individual or household demand curve) || The quantity demanded for a particular household for a particular commodity is expected to increase, or at least stay constant, as the price of the commodity falls. This relies on the assumption that the marginal benefit from every additional unit of the commodity is decreasing. There are two effects responsible for the law of demand: [[income effect]], which states that the higher the price, the less the household can spend on the good with the limited income it has, and the [[substitution effect]], which predicts that an increase in price makes the household substitute away from the good towards [[substitute goods]]. || [[Law of demand for individual buyers follows from diminishing marginal utility]], [[Income effect explains law of demand]], [[substitution effect explains law of demand]]
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| Aggregate of households, single good (seen in market demand curve) || The quantity demanded over an aggregate of households for a particular commodity is expected to increase, or at least stay constant, as the price of the commodity falls. This may happen because the consumption of individual households increases steadily, as well as because the number of households purchasing the commodity also increases steadily, as the price falls to the reservation price. The second effect is due to differences in [[reservation price]]s across households. Note that this effect is operational even when there is essentially no scope for a single individual or household to buy more than one unit of the commodity. || [[Law of demand for multiple buyers follows from differences in reservation prices]]
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The crucial thing about the law of demand that fails for these apparent counterexamples is the ''[[ceteris paribus]]'' condition. In other words, for the various goods and services that appear to violate the law of demand, the typical explanation is that a change in price is indirectly responsible for a change in one of the other [[determinants of demand]].
{| class="sortable" border==Giffen goods==="1"! Name of counterexample !! Necessary conditions !! Description of counterexample !! Which of the other [[determinants of demand]] is affected? !! Empirical evidence?|-{{further|[[Giffen good]]}} A '''Giffen || [[inferior good''' ]], should form a significant but not overwhelming fraction of household budget, there should exist other superior but more expensive goods || This is an [[inferior good]] for which the price-elasticity of demand is positive, even though the desirability of possessing the good ''decreases'' with an increase in price. The increase in demand is explained by the fact that the good consumes a sizable fraction of the consumer's income and hence, the income effect forces the consumer to shift away from higher-quality, more expensive alternatives towards consuming even more of the good. || '''Income''': The explanation for the Giffen effect is that an increase in price in this case leads to a ''decrease'' in effective income (which is one of the exogenous determinants of demand), which, combined with the [[inferior good]] nature, increases demand.|-Although there is some empirical evidence for the existence of Giffen goods, the Giffen good phenomenon is believed to be rare. ===Veblen goods=== {{further|[[Veblen good]]}} A '''Veblen good''' is a good where an increase || Increase in price leads to an increase in the desirability of possessing the good, thus leading to an increase in demand. (This effect may operate only for certain buyers and within certain price ranges).  The typical explanation for this effect is , typically explained by [[conspicuous consumption]] -- consumption done primarily for the purpose of displaying income or wealth. The larger the price, the better the consumption of the good may be as a way of showcasing income and wealth. The explanation for the Veblen effect is that price itself in this case influences the || '''Tastes and preferences of the household. Preferences are an exogenous determinant of demand.'''|-===| Price as a quality signal=== || hard to judge quality directly || In some cases, particularly for [[credence good]]s, where the buyers have no direct way of judging the usefulness of a good, the price of a good may be taken as a signal of its quality. A low unit price may be viewed as a signal of poor quality and a high unit price may be viewed as a signal of high quality. This is similar to, but not quite the same as, the situation with a Veblen good -- here, the higher price does not directly increase the desirability of possessing the good but rather is being used as a signal of other information. If the quality information were available directly, then the higher price would not increase the quantity demanded.|| '''Information about quality'''|-===| Price rise as signal of future price rise || || In some cases, buyers may view a rise of price as evidence indicative of an even greater future rise of price for that good. This may be supported by further evidence. If present purchase of that good can substitute for later purchase of the good, then this may actually increase present demand for the good. This happens in particular for durable goods where the inconvenience of not having the good for a short period of time is not that great. It can also happen for non-durable goods if the satisfaction of consuming them is durable -- for instance, a holiday trip today might substitute for a holiday trip six months from now. Similarly, buyers may view a drop in price as evidence indicative of further price drops in the future, and hence delay the purchase of a good or service. || '''Expectations of future prices==='''|}
In some cases, buyers may view a rise of price as evidence indicative of an even greater future rise of price for that good. This may be supported by further evidence. If present purchase of that good can substitute for later purchase of the good, then this may actually increase present demand for the good. This happens in particular for durable goods where the inconvenience of not having the good for a short period of time is not that great. It can also happen for non-durable goods if the satisfaction of consuming them is durable -- for instance, a holiday trip today might substitute for a holiday trip six months from now.==Counterexamples and aggregation==
SimilarlyDespite the various counterexamples to the law of demand discussed here, the law of demand continues to hold almost universally at the market level. The main reason is that the counterexample behavior is usually restricted to certain buyers may view a drop in price as evidence indicative of further and certain price drops in the futureranges, and hence delay the purchase when aggregating across large numbers of households, we still overall get a good or servicenegative price-elasticity of demand.
==Psychology==
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