A demand curve slopes downwards from left to right, but this may not always be so. Explain the statement.

Answer Details

A demand curve normally slopes downwards from left to right because of the law of demand: as price falls, quantity demanded rises, and as price rises, quantity demanded falls, other things being equal. This inverse relationship is explained by the income effect (a lower price raises real income, so more can be bought) and the substitution effect (a good becomes cheaper relative to substitutes). However, in certain cases the demand curve can slope upwards (a positive relationship between price and quantity), producing an exception to the law of demand.

The main exceptions are:

• Giffen goods: very inferior staple goods on which poor consumers spend a large share of income (for example a cheap staple like garri). When its price rises, consumers become so much poorer in real terms that they cut back on more expensive foods and buy even more of the cheap staple, so quantity demanded rises with price.
• Goods of ostentation (Veblen or prestige goods): luxury items such as diamonds, expensive cars or designer goods bought to display wealth. A higher price increases their prestige value, so more may be demanded as price rises.
• Expectation of future price changes: if buyers expect the price to keep rising, they may buy more now despite the higher current price, in order to beat the expected further increase.
• Speculative goods: shares, foreign currency and similar assets may be bought in greater quantity as their price rises because buyers expect to resell at a still higher price.
• Fear of scarcity: when a rising price signals that a good may soon become scarce, people may buy more to store, so demand rises with price.
• Quality judged by price: where buyers cannot judge quality directly, they may treat a higher price as a sign of better quality and buy more.

In each of these cases the ordinary income and substitution effects are outweighed by another force, so the curve does not slope downwards as usual. These are recognised exceptions and do not overturn the general law of demand, which holds for the great majority of ordinary goods.