Page 87 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes

Give your views on Income Consumption Curve.

4.36 Alleged Exceptions to the Law of Demand

Mostly, the curve of demand is negatively sloped which means that the price of a product and the
demanded quantity have opposite relation. But the economist states the exceptions of this term. It
means some situations where demand is positive if prices are changed. Thus the demand curve occurs
positively sloped i.e. its sloping is upward which indicates the positive relation between price and
demanded quantity. Some observations are:
1. Articles of Distinctions or Veblen Goods: Veblen goods (whose name is tagged with American
Economist T. Veblen) are honirary products like diamonds, jewellery, the paintings of big artists etc. As
per Veblen, these honorary products are demandable when the price of these products is high. Diamond
and jewellery are known as honorary products in society. The demand is high even the price is high.
If the price is low then it does not call honorary products and the demand gets low. In the words of
Watson, “If the consumer measures the desirability of a commodity entirely by its price, and if nothing
influences consumers, then they will buy less of the commodity at a low price and more at a high price.”
But the criticism should be done carefully for these observations. Because in any point of time, there
must be some consumers who will buy these snob goods like diamond when the price will drop.
While the current customer demands when price lessens. In this situation, if the number of marginal
consumer is high, then the demand for diamond could increase and the total buy from them can
increase from the initial buyers. This can also possible that the initial buyers always want to buy if
price falls. Sometimes the shopkeeper creates pseudo falling of price by discounted products and
this helps to increase the demand.
2. Ignorance: Sometimes consumer does not follow the lower pricing product due to the ignorance and
buys the minimum quantity and if the price rises then he think that product as the best and purchases
its maximum quantity. Benhem has given an interesting example for this that a book was published in
First World War with the price of 10.5 Sh. But it didn’t attract the consumers. This book was republished
after the war and this time the cost was 3.5 Pound. This time, book was the best seller. Consumer thought
the book quality was superior due to its price hike and thus, the book was the best seller book.
3. Giffen Goods– Giffen goods (name is tagged with 19th century Economist Robert Giffen) are those
goods whose demand become less if the price falls. Thus, the theory of demand does not apply on it.
For example, corn is inferior good for a normal consumer. The real income of consumer rises as the
price of corn falls. He would buy wheat with his increased real income and thus the demand of corn
would become low. So the demand gets low for
inferior goods if the cost is less and vice versa. It Be Careful
must be understood that those products on which
the demand of theory do not apply are Giffen’s All inferior goods are not Giffen’s goods. The Giffen
products. But is it also not necessary that the products are those products whose negative income
effect is greater than substitution effect.
demand of theory is applicable to all inferior goods.

4.37 Demand Theory is Unrealistic: Consumer Behaviour
Contradictory to Demand Theory

There is some observation:
1. All consumers do not behave in the same way: Yes, this is correct that all consumers do not behave
in a similar manner all the time. Two situations are mainly observed in this category –

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