Demand Profile: Classification, Process of Creating from Demand Equation
In economics, the demand curve is a fundamental concept that illustrates the relationship between the price of a product and the quantity demanded. Generally, the demand curve slopes downwards, indicating that as the price decreases, consumers are more willing to buy. However, there are exceptions to this rule, and understanding these exceptions is crucial for businesses and economists alike.
- Giffen Goods: These are inferior goods, which are products that consumers buy when they have limited income. Surprisingly, the demand for Giffen goods increases when the price rises. This happens because, despite the higher price, consumers may still need to allocate a significant portion of their income to buy these essential goods. As a result, they buy more when the price increases due to a lack of affordable alternatives.
- Veblen Goods: These are luxury goods, and their appeal increases with rising prices. The higher the price, the more these goods confer status and prestige. Examples of Veblen goods include designer handbags and luxury cars.
- Fear of Shortage: When consumers expect future shortages or price hikes, they may buy more of a good even if its price currently rises. This behaviour is driven by anticipation and the desire to secure the product before its price increases further.
- Necessities or Emergency Goods: Essential goods, such as medicines or petrol, often have inelastic demand. This means that consumers purchase these goods regardless of price changes, especially in urgent situations.
- Brand Loyalty: Some consumers remain committed to particular brands despite price increases. This loyalty is driven by emotional attachment or perceived quality, which overrides normal price sensitivity.
These exceptions to the law of demand arise due to factors like income effects, consumer psychology, expectations, or lack of substitutes. Understanding these exceptions can help businesses to better understand consumer behaviour and make informed decisions about pricing strategies.
The downward slope of the demand curve is typically due to diminishing marginal utility, where the extra satisfaction from consuming one more unit decreases as consumption increases. This principle is fundamental to understanding the demand curve and its relationship with price and quantity.
References: [1] Economics Online. (n.d.). Giffen Goods. Retrieved from https://www.economicsonline.co.uk/economics-dictionary/giffen-good [2] Investopedia. (2021). Law of Demand. Retrieved from https://www.investopedia.com/terms/l/lawofdemand.asp [3] Khan Academy. (n.d.). Demand Curve. Retrieved from https://www.khanacademy.org/economics-finance-domain/microeconomics/supply-demand/demand/v/demand-curve
- In the realm of personal-finance and education-and-self-development, understanding the concept of Giffen goods is crucial for investors, as it allows them to anticipate changes in the market for essential goods when prices rise, providing opportunities for profitable investments.
- For businesses seeking to tap into the luxury market, it's essential to recognize the existence of Veblen goods and cater to consumers' demand for products that confer status and prestige, by adjusting their pricing strategies accordingly.
