Teacher notes

Lesson time: 1 hour

Lesson objectives:

Develop an understanding that while most products have an inverse relationship between selling price and quantity demanded, there are a small number of super luxury goods and services which provide an exception to this rule and demand for the product increases in response to a rise in price.  The exercises on conspicuous consumption, Bill gates and speculative purchases of luxury property are also be potential TOK exercises.

Teacher notes:

Exceptions to the normal demand function

In economics we can identify a small range of goods and services that appear to contradict the normal rules of economics, in providing an exception to the normal demand curve.  Unlike the vast majority of goods and services which have a negative relationship between price and quantity demand, a small range of goods have a positive price elasticity.  In other words as the price of a these goods rises consumers purchase more of the good or service, not less. Similarly as the price falls consumers will purchase less of the product.  Two examples of such a product are veblen and speculative goods and we can look at both products in more detail now.

Veblen goods

Veblen goods are super luxury goods and their intrinsic value comes from their worth or snob value rather than their functional use. Consider the following: You are getting engaged and your partner offers you a choice of two engagement rings. Both look very similar but one costs $ 10,000 while the other costs just $ 1,000. Which of those would you ask your new partner to purchase? For those of you who chose the identical looking $1,000 diamond ring then you have my respect. After all this is what a rational consumer would do - purchase the cheaper ring and use the money saved to pay for your married life together.

However, many of you will have chosen the more expensive ring for the snob value and prestige that the more expensive ring provides. As a result of this the $10,000 really is worth 10 times as much as the cheaper ring. This is shown by the diagram above and to the right.  As the diagram illustrates the demand schedule for a veblen good is kinked.  At a very low price the quantity demanded is high.  As the price rises, for the good, quantity demanded initially falls but then as the price reaches  P1, the snob value effect takes over and quantity demand will rise, following further rises in price.

Speculative goods

Speculative goods represent another of the exceptions to the normal demand rule.  Speculative goods are goods where many consumers purchase the good in the hope of gaining a profit if the price rises in the future.  Examples of this might include gold, some jewellery or even prime London or New York properties.  In these examples consumers may believe that a rise in price of a product means that further price rises in the future are likely.  Of course many veblen goods are also purchased for speculative reasons, while some goods purchased in the hope of increased future profit also come with significant snob value / cache when purchased.