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Contradictory goods

One of the cardinal rules of microeconomics is that as the price of a good goes up, demand goes down. But Veblen goods and Giffen goods do the opposite.

The law of demand states that, all else being equal, as something gets more expensive, people will want less of it. Most of the time reality corresponds to this pretty well, but there are a couple of notable and curious exceptions.

Veblen goods are status symbols. Think a fancy car, expensive bottle of wine, or a painting by a famous artist. For such goods, a higher price actually makes the good more desirable, because purchasing it enables you to show off. It cries out “money doesn’t matter to me, because I’m able to spend it on something like this.” This means that as the price goes up, the demand goes up as well – contradictory to the law of demand.

To get an idea of what Veblen goods are currently in circulation, you could browse through the Robb Report, a magazine for the desperately rich. I mean desperate in the sense that they must be desperate to demonstrate their wealth: this magazine features half-million-dollar watches, superyachts, and a real estate section with castles and islands for sale.

Giffen goods are a different creature. In contrast to Veblen luxury goods, Giffen goods are often staple foods: bread, potatoes, etc. Because they’re a staple, if their price goes up people don’t stop buying them. Instead, they stop buying other foods, buying less meat for example so that they can afford bread. And so as the price goes up, the consumption of that good paradoxically goes up as well. It’s another violation of the law of demand.

(End note 1: the idea of a Giffen good is rather controversial among economists, and its original circumstance – it was observed Victorian England – may not extend beyond some very specific and rare conditions.)

(End note 2: everyone knows that it’s only the desperately rich that follow the Robb Report. The profoundly rich read Town and Country instead.)

Categories: Economics & business

The Generalist

I live in Auckland, New Zealand, and am curious about most things.

2 replies

  1. Fantastic definition of “desperately rich”, thanks for the laugh!

    The Verblen effect is interesting, but I don’t think it repeals anything about the laws of supply and demand. I can jump up, but that doesn’t repeal gravity–it’s a temporary phenomenon that lives inside a larger set of rules. Prices in the American real estate market were Verblenized before the Great Financial Crisis. Unfortunately, the size of the market for people who could actually afford the houses didn’t get bigger. Supply and demand were distorted, but never replaced. And when it comes to luxury goods, the perceived value may not be the same as the price, at all–human psychology can be funny that way.

    The Giffen thing I don’t buy at all — no pun intended. It sounds like a misunderstanding of inelasticity — demand for some items is less sensitive to price than other things — mixed in with shortages. If a famine’s coming on, swapping out meat for more bread may be a no-brainer. As bread gets more expensive, we start to look for alternatives. But if the next step down from extortionately-expensive bread is starvation (there are no substitutes for the bread), you may find that staying alive is of higher value than not being overcharged.

    1. Yeah I agree, Veblen goods are very well covered in economic theory, and are usually considered a special case in the law of demand rather than any kind of refutation or repudiation… I see it as a sort of feedback loop, where the higher price *is* the perceived value.

      I’m not going to defend Giffen goods – it’s an interesting idea, but finding actual examples in practice doesn’t seem to bear much fruit in the research.

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