Transcript document

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.
Price
Demand Curve for Armando's
Cappuccinos
25
20
15
10
5
0
0
20
40
60
80
Cups sold in a day
100
120
The Law of Demand
There is a negative relationship
between the price of a good and
its quantity demanded, ceteris
paribus.
Exceptions to the law of
demand
 Veblen (ostentatious) goods
 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 poor’s
income. e.g. rice in china.
Price of a Giffen good
D
Quantity
Demanded
►A
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 poor’s diet in China mainly
consists of rice and meat in the south, and of noodles
and meat in the north.
 Rice/Noodles Filling cheaper
 Meat
more expensive
► 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.
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