Law of Demand does operate in case of:

Question

Accepted Answer

The correct option is 2:
The term Law of Demand describes the fundamental inverse relationship in economics: when the price of a good increases, the quantity demanded decreases, and vice-versa, assuming all other factors remain constant (ceteris paribus). **Giffen Goods** are the formal, well-documented exception to this law. A Giffen good is a highly inferior product that forms a substantial part of a poor consumer's budget, such as a staple food like coarse grain. When the price of this good rises, the consumer's real income falls so significantly that they must cut down on all other, relatively expensive goods (like meat). Consequently, they are forced to substitute those other goods with *more* of the now-more-expensive staple Giffen good just to maintain caloric intake. This results in the demand for the good increasing as its price increases, which is a unique and direct violation of the Law of Demand.

The incorrect option is 1:
**Inferior Goods** are goods whose demand falls as consumer income rises. However, for the vast majority of inferior goods, the Law of Demand still holds true regarding price. Even though they are considered lower-quality alternatives, when the price of a regular inferior good increases, consumers will still buy less of it due to the substitution effect. This typical inverse price-quantity relationship means that the demand curve for a standard inferior good is still downward-sloping, and thus the Law of Demand operates in this case. Only when the negative income effect is strong enough to counteract the substitution effect does an inferior good become a Giffen good.

The incorrect option is 3:
**Normal Goods** are the most common type of good, and they comply with the Law of Demand perfectly. By definition, a normal good is one whose demand increases as consumer income rises. More importantly, they demonstrate the standard inverse relationship with price: when the price of a normal good increases, the quantity demanded decreases. The effect of both the substitution effect and the income effect works to reinforce the inverse relationship between price and quantity. The demand curve for normal goods is always downward-sloping, making them a foundational example of the law's operation.

The incorrect option is 4:
**Superior Goods**, often used synonymously with luxury goods, are a category of normal goods that have a very high positive income elasticity of demand. Since they are a sub-set of normal goods, they strictly adhere to the Law of Demand. If the price of a superior good rises, the quantity demanded for it will undoubtedly fall as consumers seek less expensive alternatives or reduce their consumption of a non-essential item. The perception of status associated with a high price can sometimes blur this, but in pure economic theory, the inverse relationship between price and quantity demanded still holds, meaning the Law of Demand operates for superior goods.