BUSINESS ECONOMICS CIA – 1

Aston Martin, the car immortalized by the superspy James Bond, is the latest entrant into Indian
ultra-luxury car market. In 2011 alone, this is the fourth super car to be launched in India after
the Rs.4.5 crore- worth Maybach in February, the Rs. 12.5 crore- Koenigsegg Agera in March
and the Rs. 1.4 crore Maserati in early April. The top-end of the Indian luxury car market is
already crowded with more than two dozen models carrying a price tag of over Rs. 1 crore.
Aston Martin has added nine more to the array of super luxury cars; among them One-77 at Rs.
20 crores, is the priciest car to be launched in India. As for the rest of the models priced between
Rs. 1.4 -2.6 crore, Lalit Choudhury, Managing Director, Performance Cars, the dealer of Aston
Martin in India said they expect to sell 30 units this Asian and Middle Eastern countries in the
next five years.

Q1. Do you think Aston Martin car presents an exception to the law of demand? If yes, explain
the particular and draw a corresponding demand curve.

A1. Yes, the models of Aston Martin cars are an exception to the law of demand.

Law of demand states that if the price of a good increases its demand reduces while other factors
remaining constant. In other words, the higher the price of a good gets, the lesser people will
demand for the good.

Aston Martin cars come under Veblen goods (exception to the law of demand)

Veblen goods:

These goods are usually exclusive, built with high quality materials, and are a status symbol. The
concept of Veblen goods was named after the economist Thorstein Veblen. He states that the
goods become more valuable as their price increases. The expensive the product, then more will
be its utility and value, and thus the demand for that product increases.

Also as the dealer of Aston Martin has agreed to only sell 30 units in the whole of Asia and
Middle Eastern countries for the next five years, thus those cars become even more rare and
unique and in return increase their value exponentially and same is for the demand for these cars.
So, as we can see in this graph that the demand for Veblen goods keeps on increasing as and as
the price increases. On the other hand, for the normal goods, it follows the law of demand, Thus
demand of normal goods decreases as the price increases.
Q2. Explain consumer behavior in the case of such high-priced cars, by comparing them with
other similar products.

A2. Luxury brands like Aston Martin, Rolls Royce, Ferrari, Maybach, Lamborghini, Bentley,
etc. have a higher perceived value compared to other companies like Toyota, Nissan, Honda,
Tata, etc. Consumers are willing to pay higher prices for a vehicle from luxurious companies,
because they feel that the price reflects the value that they are getting in return. Some luxury
vehicles are functionally identical to lower-priced models, but the details and the way the car is
positioned is what that makes the most difference.

These highly expensive cars are considered as status objects that is also one major factor that
increases the demand of these cars. The price increases the value of the cars and the value of the
cars increases the status level of the person therefore the owner of that car feels superior to rest
of the of his surroundings.