Sunday, October 22, 2017

Different Types of Goods-2

I continue to lecture about types of goods on this article where i stayed at the previous post. There are two types of goods that need to be known and those types of goods have anomalies which are contrary to the law of demand. One of them is Giffen Good and the other one is Veblen Good. Let's start with Giffen good.

Giffen Good: A giffen good is a good that as price rises, demand increases and, as price falls, demand decreases. The increase in demand stems from the income effect of the higher price outweighing the substitution effect. It is hard to find empiricial evidence about it but it can be applied to extremely poor people who have limited diet.
Suppose that you are very poor and you can't afford other alternative expensive foodstuff. On the other hand, the price of your basic foodstuff is increasing. In that situation, you will end up buying more your basic foodstuff. Because, it is the only foodstuff that you can afford.

                                                          Diagram for Giffen Good


Veblen Goods: A veblen good is a good that as price rises, demand increases and, as price falls, demand decreasse because of its exclusive nature and appeal as a status symbol. A veblen good has an upward-sloping demand curve like giffen good.
Studies suggest that people get more satisfaction from buying expensive goods and very expensive goods are indicator of having a hıgher status in society. Besides, consumers think that more expensive goods have better quality. Very expensive goods-such as designer jewelry, pricey watches, luxury cars can be classified as veblen goods.
The Basic Similarity and Difference Between Giffen Good and Veblen Good: For both giffen good and veblen good, as prices rises, demand increases. But, for veblen good, people demand more because the good is indicator of having a higher status in society and people think that it is expensive because it is a better quality. For giffen good, people demand more because the income effect outweighs the substitution effect.

No comments:

Post a Comment

A Different View of Externalities in the Context of Global Warming and Climate Change

An externality is a cost or benefit that affects a third party who did not choose to incur that cost or benefit. Externalities can be both p...