IB EconomicsExceptions to the law of demand

The Demand CurveThe 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.

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Demand Curve for Armando's Cappuccinos

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Demand Curve for Armando's Cappuccinos

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

Exceptions to the law of demandVeblen (ostentatious) goodsGiffen goodsExpectationsBoth Veblen goods and Giffen goods have upward sloping demand curvesthere is a positive relationship between the price of a (Veblen /Giffen) good and its quantity demanded

Veblen goodsVeblen goods are also called status-symbol or ostentatious goods

The elasticity of Veblen GoodsVeblen goods are luxury goods YED >1Veblen goods have a positive PED and a positive income elasticity of demand

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

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 poors diet in China mainly consists of rice and meat in the south, and of noodles and meat in the north. Rice/NoodlesFilling cheaper Meatmore expensiveThey 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 GoodsGiffen goods are inferior goodsYED

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

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