Question

“The inverse relationship between price and quantity demanded does not hold good in many cases.”

1. Justify the above as Yes or No.
2. If justified, explain in brief the Giffen Effect.

"The inverse relationship between price and quantity demanded does not hold good in many cases." Explain the statement giving four reasons.

Answer 1

1. Yes.
   • The law of demand does not apply to Giffen goods. A fall in the price of Giffen goods tends to reduce its demand and a rise in its price tends to extend its demand.
   • The law of demand does not operate when the consumers think that high priced goods are always superior in quality.
   • The law of demand does not apply to prestigious goods like diamond jewellery, costly cars etc. The demand for such goods is taken as status symbol. As their prices go up, people take it more prestigious to buy them.
   • The law is not applicable in case of basic necessities of life such as medicines, food grains, salt etc. Minimum quantities of these goods have to be purchased whatever may be price, high or low.
2. Sir Robert Giffen observed that a typical inferior commodity consumed by poor people might display odd behaviour. When the price of such a commodity rises, poor people may cut down on their purchase of other more expensive items and increase their purchases of this commodity. e.g. In Ireland during the 19th century, most of the poor people spent a maximum part of their income on cheap potatoes. They purchased very small quantities of meat, which was costlier. When the price of potatoes increased, these people began to spend more on buying potatoes by reducing their expenditure on costly meat. They purchased this inferior product just to meet their minimum consumption needs.