The Theory of the Leisure Class

Giffen and Veblen Goods

Economists are convinced that nothing "breaks" the law of demand which says that when price increases, demand decreases. Their way of explaining price increase with quantity demand increase is by claims of elasticity, substitution, and complimentary goods. But there are some goods that defy the law of demand.

Giffen goods are a type of inferior good where quantity demand increases with a price increase. These goods are a legend first thought of by Sir R. Giffen, but don't exist - to what we believe. Sir Giffen showed that for example: "a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it. But such cases are rare; when they are met with, each must be treated on its own merits." This in reality is just because all prices have risen and not just bread - and bread is still the cheapest.

Veblen goods seem more feasible. They are also known as goods of ostentation - basically showing that you have wealth. Why should a person desire more expensive goods? Even when the price is outrageous and income doesn't change (or may even decrease) the quantity demanded is still high because it is a symbol of social status. These aren't just normal goods - they are superior goods. It is hard to prove that these goods exist.

For both goods, it is hard to prove they exist. It is very hard to prove that Giffen goods are real, but Veblen goods seem more reasonable. When looking at things in a social class context, goods do seem to increase in price and quantity demand at the same time.

source:
http://kadicamardese.blogspot.com/2007/10/what-are-giffen-goods-what-are-veblen.html

Class 30 - Elasticity and Supply

 Income Elasticity of Demand:

%change in QD / %change in income

-how much consumption changes with income

            -income goes up, number is positive = normal good – buy more as income goes up

            -income goes up, number is negative = inferior good – buy less when income goes up

Ex. Income is $50,000 and you spend $500 on a good and M =2.

            If income increases by 20%, you spend 40% more on that good

            If change in income is $10,000, you spend $200 more on that good.

Cross Price Elasticity:

Cross price elasticity = positive = goods are substitutes

                                  = negative = goods are inferior

Pizza / burritos. Price of pizza increases = demand for burritos increases. = substitutes

SUPPLY

More money = produce more

            Cost = tied to an action (not just a thing)

                    = tied to a person

It costs more to make a bike than a table because bike resources are valued more and the people who make bikes have an easier time finding jobs. Opportunity cost of table resources are less than the bike because people bid away resources.

Quantity supplied vs law of supply:

Quantity supply = amount of good that firms are willing/able to produce at a particular price

Law of Supply = price of a good rises = sellers make more.

Class 29 – Elasticity for Campbell’s Soup = Mmmmmmm….

The law of demand says that when something is more expensive, we consume less of it

Elasticity = m - %change in QD / %change in whatever you are interested in

Here’s an example:

-Price elasticity of demand for apples:

Initial price = $1.50/lb            Initial QD = 6 lbs

Final price = $2.00/lb              Final QD = 2 lbs

m = ((2-6)/6)/ ((2.00-1.50)/1.50) = (2/3)/(1/3) = 2

The price elasticity demand for apples at that price is 2. If it was 10, you would be very sensitive and would probably stop consuming apples.

M:

If (-1 > m < 1) = inelastic = people are NOT very sensitive to price change = vertical graph (“I”)

If (-1 = m = 1) = unit elastic

If (-1 < m > 1) = elastic = people are very sensitive to price change = horizontal graph

Impacts of Elasticity:

            Time – not instantaneous

            Budget – some goods are a small portion so price change doesn’t matter

            Substitutes

More narrowly define a goods = higher number of substitues

-car, minivan, red ford minivan           red ford minivan = highest elasticity – more elasticity

Class 28 – Demand Change and Elasticity

Today we talked about what affects market demand. Comparative statics are what things impact the amount of a good we buy.

To move up and down the demand curve: price changes. (change quantity demand).

To move the demand curve (shift whole demand curve left or right):

            Changes in income – more income doesn’t mean you consume more.

            Price of other things change

            Expectations change – what the future predicts about demand impacts us today

            Tastes change – preferences change

            Number of participants

Normal goods – income increases = quantity demand increases

Inferior goods – income increases = quantity demand decreases

Substitute goods – price of good X increases – demand for good Y increases

Compliment goods – price of good X increases – price for good Y increases

Quantity demand is defined as how much of a good we consume as a function of our ability/willinness to buy it.

Elasticity:

When the law of demand seems to not apply.

Elastic - consumption is VERY responsive to change in price

Inelastic - consumption is NOT that responsive to change in price

We measure this using Own Price Elasticity of Demand:

m=%change in quantity demanded / %change in price.

If m =2, and price increases by 10% then you consume 20% less.