When Demand Graph Slopes Upwards?

A Few Exceptions with Examples!

We draw a demand graph to show an inverse relation of demand with price. The graphic representation makes the curve slopping downwards. However, under specific conditions, the demand curve slopes upwards to create an exception. The economists name the following goods to behave weird way on demand graph under certain conditions:

1-   Giffen goods (basic staple food)

2-   Veblen goods (Snob goods)

3-   Speculative market goods

4-   Demand for scarcity or fear of scarcity

Giffen Goods and Demand Graph

Giffen goods are an exciting phenomenon of economics. Most of the economists have not found their existence outside textbooks and imaginations. However, sometimes the lowest income groups of a society may behave towards some staple food in a way which causes the demand graph to act abnormally vis-à-vis prices. They start demanding more goods with an increase in the price.

Some economists term this phenomenon as a paradox. Robert T. Jensen and and Nolan H. Miller from Harvard Kennedy School of Public Policy attempt to provide empirical evidence for Giffen behavior. Some don’t think them existing but consider the phenomenon as a situation.

Such a situation was created in case of potatoes in Ireland during the famine of the 1940s. The potatoes were the basic staple food for the poorest of the society. Its demand soared with the rise in price for some reasons including its shortage, fear of scarcity and most of all unavailability of any cheaper substitute staple food.

You can click to read more on Giffen goods

Veblen Goods and Demand Graph

If basic food staple can create an exception to the law of demand, the luxury goods also do so to some extent. These goods include high-quality wine; specific designer made handbags and dresses and luxury cars, etc. fall in this category. An American Thorsten Veblen observed in 1927 that rich people like to spend more on luxury and fancy goods when their prices rise. Actually, these things become a status symbol and the rich of the society like to maintain their status. They are also called snob goods.

The Veblen goods help us to analyze purchasing preferences of the elite class in a society. The iPhone has become a necessity in most of the developed countries. They have a variety of benefits to use the latest model of iPhones. The 3G technology supports their phones to help them to achieve their desired results. Pakistan is in the process of introducing this technology. However, most of the rich people like to purchase iPhones or BlackBerry. Another interesting trend regarding Veblen goods can be observed in the middle class who likes to copy the elite one. They can’t afford to purchase the latest models of the iPhones, so they feel content with the second hand or copied versions of the iPhones.

Veblen terms this trend as conspicuous trend. Interestingly, if prices of these goods are reduced the consumers become less interested to purchase them as they are no more qualified to be a status symbol of the rich people. However, an increase helps the sellers to sell more of such things.

One thing must be kept in mind that Veblen goods can’t behave so for infinity. A price level comes where even the rich people can’t afford to purchase such products. In such a situation they start following the simple law of demand.  

Speculative Market Goods

Speculations also help to raise the demand for a good with an increase in price. We can observe demand increasing trends with prices of the estate not only in the USA but also the world-wide during 2008 & 2010 which resulted in price bubbles and Asian and American financial crises. Similarly, speculation on food items resulted in the economic bubble during 2007-08 and led to food crisis worldwide.

Peter Wahl noted in a paper that the prices of food increased by 71%. However, the demand rose not only in the USA but also in the emerging economies. He has also discussed the role of speculations on prices and demand of the commercial trade. He has also pointed out that such trends distort market prices, increase instability and inefficiency in the market.

Demand in Scarcity or Fear of Scarcity

A scarcity of essential goods or such a fear helps the producers to increase prices of their products. As per the law of demand, this should naturally result in a decrease in demand. But it does not. People fear that if they didn’t purchase such products in advance, other people might consume them.

Scarcity may be artificial or natural. When we talk about lack of natural resources, we find that law of demand does not fit into the situation too. Suppose we receive information that water is going to dry up from the earth within a week. The water sellers increase the price by manifold. What will happen to the demand graph?

Naturally, they shall try to spend every penny to purchase more and more water for their consumption to avoid death. It is an extreme example, but most of the exceptions to the law of demand fall into such extreme categories.

Is law of Demand a Law?

Origin of Supply and Demand Model

Supply and Demand Lesson

Why Demand Graph Slopes Downwards?

Elasticity Definition

Price Elasticity

Price Elasticity of Demand

What Other Visitors Have Said

Click below to see contributions from other visitors to this page...

Ceteris Paribus? Not rated yet
Except for Giffen goods, I do not think there could be upward-sloping demand curves. The other examples are noy holding othet things constant and confusing …

Laws of Economics in Changing World Not rated yet
Do laws of economics fully satisfy the changing statistics of today? By Admin: Thanks for your interest in economics. In one sentence, the laws of economics …

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