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Microeconomics

Supply and Demand (economics)

Economics

Does the demand curve ever slope upward?

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9 Answers

Sven Feldmann, knows a bit about economics and politics.

Answered Aug 30 2016 · Author has 54 answers and 67.1k answer views
Before asking whether a demand curve can ever slope upward, one should remind
oneself why the demand curve normally slopes down. The reason is two-fold: when a
good gets more expensive, consumers are more likely to buy a substitute. The easier it is
to find a (suitably priced) substitute, the quicker the demand goes down, i.e., the more
price sensitive (elastic) the demand will be. This reason for decreased demand at higher
prices is called the substitution effect.

The second reason demand typically goes down when the price of a good rises is that a
price rise de facto makes the consumer poorer, as she can now afford fewer goods with
an existing budget. The nominal income has not changed, but the real income has, i.e.,
the bundle of goods that the income can buy. This second reason for the reduction of
demand is thus called the income effect.

For normal goods the income effect is positive: the higher the (real) income, the more of
a good the consumer will buy. This of course assumes that the consumer
actually wishes to buy more of the good. This is not the case for inferior goods: with
higher income she’d rather buy less of these goods since she can now afford other, more
desirable goods. Examples are: potatoes, inexpensive clothing, and Hyundai cars. With
higher income, a family can afford a more diverse diet instead of eating potatoes every
day; is able to afford more fashionable clothing; and is able to afford a roomier and
comfortable car. So, with increasing income the consumer eventuallybuys less of an
inferior good, thus the income effect for inferior goods is negative.

Now back to the demand curve. The ordinary demand curve, also known as
the Marshallian demand curve (named after Alfred Marshall), relates the demand of a
good to its price, holding everything else constant — in particular the quality of the
good, the price of other goods, and nominal income. As the price of a normal good rises,
demand for the good decreases as a result of the substitution effect anddecreases further
as a result of the income effect, since the real income of the consumer is reduced.

For inferior goods however, demand decreases as a result of the substitution effect,
but increases as a result of the income effect. Typically the substitution effect is larger
than the income effect, so overall the demand is still reduced by a price increase, even
for inferior goods.

But it is conceivable that the income effect more than offsets the substitution effect, in
which case the demand for the good would increase as its price increases. This is the
case of the famous Giffen good. However, the income effect can exceed the substitution
effect only for a limited range of the demand curve, hence the demand curve would have
a little blip rather than being upward sloping throughout.

There is a demand curve that only looks at the substitution effect of price changes, called
the Hicksian demand curve. In this demand curve the consumer’s income is (at least
conceptually) adjusted to offset the reduction in real income resulting from a price
change. A Hicksian demand is always downward sloping, as the income effect is not
present.

There are two other situations that are sometimes argued to cause the demand curve
slope upward, and which are mentioned in some of the other answers.

The first case is the “Veblen effect” for luxury goods. This effect occurs when a consumer
likes an expensive goods because it is a status symbol. When the good becomes cheaper
and therefore affordable to more people, its status is reduced and the consumer may no
longer be willing to buy it at the lower price—a seemingly upward sloping demand.

Notice however that the good loses its status because it’s affordable to more people and
“everyone has one” (think “iPhone”!). But in this case more people must have purchased
a iPhone, not fewer! So even though for an individual the good may exhibit the Veblen
effect and is less attractive at the lower price, the overall market demand must still have
increased at the lower price. It is therefore unlikely (impossible?) that the market
demand is upward sloping as a result of the Veblen effect.
 A second case occurs when the quality of the good is uncertain and the consumer tries to
infer quality from its price. This is reflected in the common observation that “you get
what you pay for.” The question here is whether this inference constitutes an
equilibrium. If the seller knows that the consumers infers quality from price, then why
wouldn’t she simply raise the price (without an increase in quality)? There is, maybe, an
implicit assumption about the market equilibrium that forces the lower-quality seller to
charge a lower price than a higher-quality seller. If that is the case, then an uninformed
consumer can indeed use the price as a signal of quality. But the equilibrium requires
that there are enough informed consumers to prevent the lower-quality seller from
raising the price.

In both of the above cases—status of the good and inferred quality—the consumer’s
evaluation of the good changes with the price of the good. The consumer’s preference is
therefore not fixed. To say that the demand function is upward sloping is a stretch, since
the good in question—or at least, the consumer’s perception of the good—is no longer
the same. At the very least this would no longer be a Marshalling demand curve, which
holds everything other than the price (including the quality/status of the good)
constant.

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Related QuestionsMore Answers Below

 What causes the demand curve to slope upwards?

 Does demand slope upward?
 Why does the IS curve slope downward?
 Why are demand curves downward sloping?
 What would cause a demand curve to shift?
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Tim Altom, works at IBM Cloud

Answered Aug 27 2016 · Author has 2.1k answers and 1.2m answer views
Goods that follow an upward-sloping demand curve actually have a name: Giffen goods.
These are goods and services that demonstrate “conspicuous consumption” as Veblen
used the term. Giffen goods are named after Robert Giffen, who wrote about the
phenomenon.

For most of us, we use the doctrine of “inferior goods” when making buying decisions.
They’re goods and services that we’d just as soon replace, but can’t at our income levels.
For instance, we might want a Maserati, but we’re stuck with a used Chevy, or a Timex
instead of a Rolex. We want want goods that impress others, show off our social
elevation, and make life more pleasant. Many of the high-end goods see demand
increase when price increases.

The economic situation is actually a bit more complex than this in practice. The
substitution effect causes most demand curves to trend down, as lower prices increase
demand and consumption. If peanut butter goes down in price, many people would buy
more peanut butter and use it more lavishly, in preference to, say, hazelnut spread.
Others may instead opt to reduce peanut butter purchases and with the same dollars
move up to hazelnut spread. Then hazelnut spread becomes a Giffen good.

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Scott Oliver, Chemical Engineer and MBA at Chevron

Answered Oct 5 2017 · Author has 440 answers and 85.8k answer views
Not usually, but there are a few situations when demand curves slope upwards. Consider
status symbols of the rich, the expensive toys people use to show others that they've
made it. Dealers of very high-end exclusive products, like Italian sports cars, can
sometimes raise their price to increase demand. They are exploiting the quirk in human
nature that makes people want something more because it costs more, and by buying it
they prove their ability to buy things others can't.

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Suraj Neupane
Answered Aug 29 2016
Yes there is a category of good called “Giffen Goods” in Economics where demand curve
slopes upward. Giffen goods doesn't hold true the Marshallian Law of Demand. An
example of Giffen good can be seen in underdeveloped countries. For example for
extreme poor family which, say, consume potatoes and Meat. The demand for the
quantity of potatoes increases when the price of potatoes increases because their low
level of income does not allow them to consume more meat..
472 Views

John Fruehe, BS in Economics

Answered Dec 23 2017 · Author has 886 answers and 1m answer views
Yes, but that curve is often temporary.

The iPhone X is an example. When it was announced there was demand, as people
started offering them for sale “before” the launch, there was a sudden increase in
demand as people wanted to be the first to get them. As we got closer to the launch date,
the “street price” for having one on day one went up higher and higher.

Then it was released, the vanity of having one on the first day was shot and the price
dropped back down.

Bitcoin was similar in the short term. there is a limited number of coins and they kept
getting bid up. And up. And up. The more the price rose, the more the demand seemed
to rise.

Then it took a s—- this week, dropping ~35% in a week. Apparently the demand was met
;)

194 Views

Dan Marshall
Answered Aug 28 2016 · Author has 438 answers and 154.8k answer views
In addition to Veblen/Giffen goods (conspicuous consumption goods), I have heard of a
second exception to the law of supply and demand. Unfortunately, I forget the name of
this category of good. I do remember that it responds to the law in isolation, but it
substitutes for a higher value/higher price good. So when both goods go into higher
price, more consumers switch to the lower value/lower price good, increasing its
demand despite its higher price. ALDIs brand toliet paper might be an example.
628 Views

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