IB Economics

Exceptions to the law of demand

The Demand Curve

The demand curve is a graph showing the amount of a good that people are willing and able to buy at different prices during a specific period of time.

Demand Curve for Armando's Cappuccinos

25 20 15 10 5 0 0 20 40 60 80 100 120
Cups sold in a day

Price

The Law of Demand

There is a negative relationship between the price of a good and its quantity demanded, ceteris paribus.

 Veblen (ostentatious) goods

Exceptions to the law of demand

Giffen goods
Expectations
Both

Veblen goods and Giffen goods have upward sloping demand curves
there is a positive relationship between the price of a (Veblen /Giffen) good and its quantity demanded

Veblen goods
Veblen

goods are also called status-symbol or ostentatious goods

Price of a Veblen good D

Quantity Demanded

The elasticity of Veblen Goods

Veblen

goods are luxury goods

YED >1
Veblen

goods have a positive PED and a positive income elasticity of demand

Giffen goods
A Giffen good is an inferior that constitutes a large percentage of the very poors income. e.g. rice in china.
Price of a Giffen good D

Quantity Demanded

research paper by Jensen and Miller suggests that there is empirical evidence of Giffen behavior for rice in southern China and for noodles in the north of China. They noted that the very poors diet in China mainly consists of rice and meat in the south, and of noodles and meat in the north.
They

also noted that an increase in the price of rice results in an increase in rice consumption in the south, while an increase in the price of noodles results in an increase in noodle consumption in the north. This behavior could be attributed to the increase in the price of the giffen good resulting in a decrease in the income available to spend on the other good, which induces them to buy more of the giffen good, which is more filling.

Rice/Noodles Filling cheaper Meat more expensive

The elasticity of Giffen Goods

Giffen

goods are inferior goods

YED<0
Giffen

goods have a positive PED and a negative income elasticity of demand

The role of expectations

A

price increase may induce people to buy more of a good if they expect the price to rise further in the future A price decrease may induce people to buy less of a good if they expect the price to fall further in the future
e.g. the demand for cars in Egypt in 2005 The price fall did not result in an increase in car purchases as people expect the price to fall even further due to the (GATT)

The End