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 26 - Transaction Costs and Demand

Transaction costs = stop beneficial transactions. Middlemen have the comparative advantage to lower transaction costs – able to bring consumers/producers together. Supermarkets are middlemen. Price is higher but consumers don’t have to travel all the way to factories or farms. Middlemen exchange property rights. They bridge barriers between transaction costs and get rich.

Demand

Demand is a relationship between the amount of something you wish to get and the sacrifices needed to get it.

We moderate this when circumstances change.

This is not an all or nothing concept. It is not a marginal concept.

People specialize and don’t resort to self-sufficiency because we live in a large, impersonal world. Exchange can occur in small communities.

Problems in a huge world = information problems and transaction costs.

The price is information – signals to buyers/sellers about costs and values. The knowledge and resources allow order to emerge.

Quantity demand is a number. It’s the amount of a good that buyers are willing and able to consume at a particular price.

Law of Demand = other things equal. The quantity demanded good falls when price rises. We buy less when things get expensive.

Markets are any group of buyers and sellers. It is any unorganized, decentralized interaction between buyers and sellers. This causes 1 of 2 things to emerge: money prices or non-money prices (education/healthcare/etc). Markets blend the 2 and get order.

Buyers = demanders. In goods markets, the demanders are households and in factor markets the demanders are firms.

Sellers = suppliers. In a goods market, the suppliers are the firms and in goods markets they are the households.