Exceptions to the law of demand

Veblen Goods are good which have a snob value status. Consumption of the good means more to consumers than just the direct utility received, people consume goods for the associated status and exclusivity. Not consuming enough of a Veblen good can also be a mark of inferiority and be considered demerit.

Any Veblen good starts off with a normal demand curve (under the snob value status price), the transformation to a Veblen good begins when the price rises above the Snob Price after which consumers believe that they should consume more of the good due to their high prices. Examples of such goods are diamonds and perfume. The increased consumption of such goods makes the user appear wealthy and cultured, which are not directly caused by the consumption of Veblen products.

Giffen Goods are a unique type of inferior goods that only exists in poverty. First of all, inferior goods are goods for which demand falls as prices rise, this is because consumers are now able to afford goods of better quality that perform the same functions. Perhaps the best example is matches, as the price of goods increase in general, consumers are likely to change their spending patterns and replace matches with lighters.
Examples of Giffen Goods are rice and potatoes, they are as such because of their importance to consumers. Being the main staple food for their respective cultures people are dependent on them and would always purchase such products regardless of its price. The price would just affect the quantity purchased.

While the law of demand states that as prices increase, the level of demand would fall, this is not observed for giffen goods. A good way to understand this phenonmom is to use a short example.

When the price of rice is low the demand for rice is low. This is because the people in poverty can purchase the same amount of rice that they would need for a lower price, meaning they have more disposible income to buy better quality products such as meat and vegetables. As prices increase, their real disposible income would fall, meaning consumers would be unable to buy the better products and resort back to the purchase of the staple good. This occurs because staple goods have NO substitutes.

Role of Expectations

The role of expectations can affect any good, but the most common goods affected are shares, stocks and resources such as gold and oil.

The expectations of consumers have direct impacts on their consumption patterns. If consumers expect inflation to be high, they would most likely spend more money in the near future. The opposite occurs if interest rates are expected to rise.

If the prices of goods are expected to rise, consumers would more likely purchase the good earlier to avoid having to pay extra charges in the future. There are many other examples.