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Table of Contents

  1. Topic pack - Microeconomics - introduction
  2. 1.1 Competitive Markets: Demand and Supply
  3. 1.1 Competitive Markets: Demand and Supply - notes
    1. The nature of markets
    2. Types of markets
    3. Market structure
    4. Spectrum of competition
    5. Demand
    6. The law of demand
    7. Individual and market demand
    8. Non-price determinants of demand
    9. Movements along the demand curve
    10. Shifts in the demand curve
    11. Example - shifts and movements along a demand curve
    12. Exceptions to the normal law of demand
    13. Linear demand functions
    14. Linear demand functions - example
    15. The law of supply
    16. Non-price determinants of supply
    17. Movements along the supply curve
    18. Shifts in the supply curve
    19. Shifts and moves of supply curve
    20. The real supply curve?
    21. Linear supply functions
    22. Linear supply functions - example
    23. Market equilibrium
    24. Market equilibrium - notes
    25. Excess demand and excess supply
    26. Example 1 - the market for DVD players
    27. Example 2 - the market for fish
    28. Applications of demand and supply
    29. Calculating market equilibrium
    30. Calculating equilibrium - example
    31. Scarcity and choice
    32. Choice and opportunity cost
    33. Price signalling
    34. Market efficiency - consumer surplus
    35. Market efficiency - producer surplus
    36. Allocative efficiency
  4. 1.1 Competitive markets - questions
  5. 1.1 Competitive markets - simulations and activities
  6. 1.2 Elasticities
  7. 1.2 Elasticities - notes
  8. Section 1.2 Elasticities - questions
  9. Section 1.2 Elasticities - simulations and activities
  10. 1.3 Government intervention
  11. 1.3 Government Intervention - notes
  12. 1.3 Government intervention - questions
  13. 1.3 Government intervention - simulations and activities
  14. 1.4 Market failure
  15. 1.4 Market failure - notes
  16. Section 1.4 Market failure - questions
  17. Section 1.4 Market failure - simulations and activities
  18. 1.5 Theory of the firm
  19. 1.5 Theory of the firm - notes (HL only)
  20. Section 1.5 Theory of the firm - questions
  21. Section 1.5 Theory of the firm - simulations and activities
  22. Print View

Exceptions to the normal law of demand

We have assumed so far that demand curves slope downwards from left to right, and most of the time this is true. However, there are a few circumstances where it is possible for the demand curve to slope upwards to the right. This may be for the whole curve or, more likely, it may be over a certain price range, as shown in Figure 1. This is often termed a perverse or upward sloping demand curve.


Figure 1 Perverse demand curve

There are two particular types of goods where this may occur and they are called Giffen goods and Veblen goods. Let's look at the definitions of these.


Giffen good

A Giffen good is a good for which an increase in price results in an increase in demand for the good. It is an extreme inferior good and will have a perverse (i.e. upward sloping) demand curve.


Veblen good

A Veblen good (named after an American economist - Thorstein Bunde Veblen) is a good that has an upward-sloping demand curve. People buy more of the good because it is more expensive and therefore demand is higher when the price is higher.

Giffen goods

In some poor countries, the people often live on a basic diet of rice which is very cheap plus a few more expensive vegetables or some much more expensive meat or fish. In such societies, if the price of rice rises then the people may well decide to buy more in order to substitute it for the more expensive vegetables and meat. There has been an increase in demand in response to an increase in price. Sir Robert Giffen fist noticed this phenomenon. In the 19th century, he saw that the demand for potatoes increased in response to the rises in the price of potatoes caused by the great potato famines in Ireland. Hence products of this kind are known as Giffen goods. Examples of Giffen goods are difficult to find in richer countries.

Veblen goods

Products such as perfumes, expensive cars, jewellery, works of art and designer clothes may be regarded as Veblen goods. With these products, a rise in price is often interpreted by the consumer as an increase in quality or ostentation and so they may decide to buy more, thinking that they are buying a superior product. There may be psychological factors at work. The economist Veblen carried out research into this and concluded that the price of a product conveyed more than just value information for the consumer; it also represented status and exclusivity. These products which appear to experience rising demand with rising price are known as Veblen goods.

The demand curve for such goods will slope upwards from left to right.


Price expectations

It is also possible for goods where price expectations are critical to have perverse demand curves. This is because if people expect prices to increase further, then they may buy more now. In this case it appears that an increase in price has increased demand, but in reality this has come about because people expect prices to rise even further in the future.