Key Takeaway:
The law of demand, which states that as prices rise, demand generally falls, is a fundamental principle in economics. However, some goods, such as Veblen and Giffen goods, challenge this rule. Veblen goods, also known as “snob” goods, are valued for their prestige, exclusivity, and social standing. They are valued for their intrinsic utility and the status they confer upon the buyer. On the other hand, inferior goods, such as fast food or public transportation, are less popular as income increases. However, Giffen goods, which are unique in that they increase demand even as prices increase, are more popular among those with limited financial resources. These exceptions reveal deeper insights into consumer motivations, from the social prestige of a luxury watch to the survival instinct behind buying bread.
In the world of economics, goods and services come in many forms, each with its own unique behaviors and classifications. Though not commonly known by name, most people are already familiar with the basic types simply through everyday purchases. These are the essentials, the luxuries, and the things that fill shopping carts as income grows. Economists call these “normal goods,” products that people tend to buy more of as they earn more.
With a higher income, individuals may choose healthier, more nutritious foods, upgrade their wardrobes, or spend a bit more on dining out and social events. Normal goods, however, follow a fundamental rule: as prices rise, demand generally falls. This concept is what economists term the “law of demand,” a principle that may feel intuitive but is rooted in the economic assumption that higher costs discourage consumption.
But some products challenge these norms. There are certain goods that, instead of shrinking in demand with rising prices, become even more coveted. Enter Veblen and Giffen goods, categories that break the rules of economic behavior, each for different and intriguing reasons.
The Essentials and the Exquisites
Among normal goods, economists further divide them into necessity goods and luxury goods. Necessity goods are essential items for daily life: groceries, shelter, utilities, and basic healthcare. These are the must-haves, the backbone of everyday living.
On the other hand, luxury goods are the indulgences—high-end cars, designer clothing, gourmet meals, or elaborate vacations. These are items one might wish for but are not required for survival. As income rises, people can afford these luxuries, yet they are also the first expenses to cut when budgets tighten.
For both types, the law of demand typically holds. A surge in prices leads people to pull back, shifting focus away from these items. But Veblen and Giffen goods defy this predictable trend, adding an element of intrigue to the world of consumer behavior.
The Prestige of Veblen Goods: When Price Means Everything
Named after American economist Thorstein Veblen, Veblen goods are also known as “snob” goods. For these items, price and demand have an unusual relationship: the higher the price tag, the more people want them. High-end art, luxury cars, and exclusive fashion pieces often fall into this category. The allure of these items increases with their price because they signal prestige, exclusivity, and social standing.
These Veblen goods are valued not just for their intrinsic utility but for the status they confer upon the buyer. Owning such items suggests sophistication, wealth, or an elite status, often making them highly sought-after even as prices soar. Economists call these “positional” goods, meaning their worth is tied to the perception of who owns them and how scarce or exclusive they are.
The appeal of a Veblen good doesn’t rest solely in its practical use. Rather, it lies in the sense of exclusivity and the ability to showcase one’s place in the social hierarchy. Their high price is often an asset rather than a deterrent, adding to their perceived value.
The Rise of Inferior Goods: The Necessities That Fall Away
On the other side of normal goods lie inferior goods. These are products people tend to buy less of as their income increases, moving on to higher-quality alternatives. Fast food, instant noodles, or public transportation can fall into this category. When someone can afford a healthier diet, they may start skipping the instant meals. When they buy a car, they might stop using the bus. As a person’s income rises, the demand for these “inferior” goods declines.
But within this category exists a rare and puzzling exception to the law of demand: Giffen goods. These goods are unique in that, as their prices increase, the demand also rises, especially among those with limited financial resources. For individuals with constrained budgets, rising costs on staple items such as bread or rice may push them to buy more of these goods, even as they become more expensive.
The reasoning behind this phenomenon lies in the absence of affordable alternatives. When the price of a Giffen good rises, consumers on tight budgets may be forced to buy less of more expensive items, like meat or fresh produce, relying instead on the staple that’s still just within reach, even at a higher price.
The Power of Price in Shaping Demand
In the end, the rules of supply and demand apply broadly but not universally. While necessity goods, luxury items, and inferior goods often follow predictable patterns, the curious cases of Veblen and Giffen goods show how exceptions can reveal deeper insights into consumer motivations. From the social prestige of a luxury watch to the survival instinct behind buying bread, the relationship between price and demand can tell a much richer story than first meets the eye.
