The Capitulation of Supply-Demand Relationship: An Overview of Its Functions
In the realm of economics, not all goods follow the traditional law of demand, where an increase in price results in a decrease in quantity demanded. Two unique categories of goods, Veblen and Giffen goods, buck this trend.
Veblen goods, named after the economist Thorstein Veblen, are goods where the quantity demanded increases as their price rises. Luxury goods, such as designer clothes, high-end gadgets, and branded designer bags, are prime examples of Veblen goods. Consumers perceive these items not only as a cost but also as an extra utility. The higher the price, the more it signifies status and exclusivity, making these goods more desirable.
On the other hand, Giffen goods, named after economist Robert Giffen, are a specific case of inferior goods. The demand for these goods decreases as their price falls. Examples include used clothes, cassava, and other low-quality foods. In low-income regions, staple foods such as rice, bread, potatoes, and sometimes milk can be Giffen goods. Here, the income effect dominates the substitution effect, forcing consumers to buy more of the staple despite higher prices to meet basic needs.
The law of demand, which assumes constant consumer income, the price of goods, tastes, price expectations, and prices of related goods, does not apply to these goods. Other factors, such as consumer income, consumer tastes and preferences, prices of related goods (complements or substitutes), and future price expectations, also play significant roles in influencing demand.
The price affects both consumer satisfaction and producer profits. For consumers, the price represents the costs they have to incur to satisfy their needs and wants. For producers, profits increase when they can sell the product at a higher price.
It's important to note that in a market, producers and consumers interact to determine the equilibrium price, which is the best price for both parties. This price balance ensures that the quantity supplied equals the quantity demanded, creating a stable market environment.
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Businesses can find opportunities in the education-and-self-development sector, as understanding the concepts of Veblen and Giffen goods can provide valuable insights for marketing luxury goods (Veblen goods) and strategizing for low-income consumer markets (Giffen goods).
Finance plays a crucial role in this context, as it allows businesses to allocate resources for research and development, identify target markets, and set strategic pricing strategies based on consumer behavior and demand patterns for these unique goods.
