Decreasing consumer demand as price rises explained
In the world of economics, it's generally accepted that as prices rise, the quantity demanded of a product decreases. However, there are some intriguing exceptions to this rule, known as goods with upward-sloping demand curves. These unusual cases challenge the traditional law of demand and provide a fascinating insight into consumer behaviour.
One such example is Giffen goods, named after the Scottish economist Robert Giffen. These are inferior goods, meaning they are typically purchased by those with lower incomes. Interestingly, when the price of a Giffen good rises, demand for it actually increases. This happens because the income effect, or the reduction in purchasing power due to the price increase, outweighs the substitution effect. Consumers, unable to afford better alternatives, end up buying more of the cheaper Giffen good [2].
Another type of good with an upward-sloping demand curve is Veblen goods, also known as status goods. These are luxury items that become more desirable as their prices rise, due to their association with status and prestige. The higher the price, the more desirable these goods become, stimulating greater demand [3].
In speculative markets, such as stocks or collectibles, demand can also show an upward slope temporarily. Here, increasing prices lead buyers to expect further price rises, prompting more purchases now to avoid missing out, thus reversing the normal demand behavior [3].
The demand for a product is influenced by three key concepts: diminishing marginal utility, income effect, and substitution effect. According to the law of diminishing marginal utility, consumers are only willing to consume and pay for the next unit if its price is lower than the previous unit [4]. The income effect relates price changes to changes in real income and consumers' willingness and ability to buy [5]. The substitution effect, based on the relative price of products, explains how consumers choose one product or its substitute depending on which one is more attractive and affordable [6].
However, these concepts don't always apply to all goods. For instance, when the price of a product rises, some consumers turn to its substitutes, reducing its quantity demanded. But for Giffen goods and certain speculative or status goods, psychological, income effects, or expectations cause demand to rise as price rises, defying the typical inverse price-demand relationship [2][3].
In conclusion, goods with upward-sloping demand curves are unusual cases like Giffen goods and certain speculative or status goods, where psychological, income effects, or expectations cause demand to rise as price rises, challenging the traditional inverse price-demand relationship [2][3]. Understanding these exceptions provides valuable insights into consumer behaviour and market dynamics.
References: [1] Investopedia. (2021). Giffen Good. Retrieved from https://www.investopedia.com/terms/g/giffen-good.asp [2] Investopedia. (2021). Veblen Good. Retrieved from https://www.investopedia.com/terms/v/veblen-good.asp [3] Investopedia. (2021). Speculative Bubble. Retrieved from https://www.investopedia.com/terms/s/speculativebubble.asp [4] Investopedia. (2021). Law of Diminishing Marginal Utility. Retrieved from https://www.investopedia.com/terms/l/lawdiminishingmarginalutility.asp [5] Investopedia. (2021). Income Effect. Retrieved from https://www.investopedia.com/terms/i/incomeeffect.asp [6] Investopedia. (2021). Substitution Effect. Retrieved from https://www.investopedia.com/terms/s/substitutioneffect.asp
- In the realm of personal finance and education, learning about goods with upward-sloping demand curves, such as Giffen and Veblen goods, can offer valuable insights into complex consumer behavior and market dynamics.
- When it comes to investing, understanding the concepts of diminishing marginal utility, income effect, and substitution effect can help in making informed decisions, but it's essential to realize that these concepts may not always apply to goods with unusual demand curves, such as Giffen and certain speculative or status goods.
- Pursuing a comprehensive education in business and personal finance can equip individuals with the knowledge to navigate the intricacies of goods with upward-sloping demand curves and the broader economic landscape, enabling them to make informed decisions that not only challenge conventional wisdom but also benefit their financial wellbeing.
