Demand Profile: Classification, Method of Representation from a Demand Equation
In the realm of economics, a demand curve is a graphical representation that demonstrates the relationship between the price of a good and the quantity demanded of it. The Y-axis represents the price, while the X-axis represents the quantity. Generally, the demand curve has a downward slope, indicating that an increase in price leads to a decrease in the quantity demanded, and vice versa.
However, there are exceptions to this rule, which are worth exploring. One such exception is the Giffen good, an inferior good where the demand for it increases when its price rises. This phenomenon occurs because the negative income effect, where an increase in price reduces the consumer's ability to purchase other goods, outweighs the substitution effect, where the consumer opts for cheaper alternatives. Examples of Giffen goods can be found among basic food items like bread or potatoes for low-income consumers.
Another exception is the Veblen good, a luxury good where an increase in price enhances its appeal due to perceived status or exclusivity. Examples include designer handbags or luxury cars. In these cases, the rising prices make wealthy consumers demand more of the product, as it becomes a symbol of higher status or prestige.
There are other factors that can cause changes in demand, leading to a shift in the demand curve. These include consumer expectations, emergencies or crises, and consumer ignorance. For instance, if consumers expect prices to rise in the future, they may buy more now to avoid future price increases. Similarly, during emergencies or crises, people may buy more essential goods even if prices rise, as seen with fuel during shortages or water during natural disasters.
In some cases, the demand curve may exhibit a kink, consisting of two straight lines with different elasticities. This occurs in the oligopoly model, where demand is elastic for price increases, causing a higher percentage decrease in quantity demanded when the price rises.
It's important to note that the slope of the demand curve is determined by the diminishing marginal utility, where the extra satisfaction from consuming one more unit decreases each time consumption increases. This slope can be calculated by dividing the change in price by the change in quantity demanded (ΔP / ΔQd).
In summary, while the demand curve typically shows a negative correlation between price and quantity demanded, there are exceptions and special cases that warrant attention. Understanding these exceptions can provide valuable insights into consumer behaviour and market dynamics.
[1] Berry, L. L., & Berry, L. L. (2012). Microeconomics: Principles and Applications. Pearson Education. [2] Mankiw, N. G. (2014). Principles of Microeconomics. Cengage Learning.
- In the realm of personal-finance and career-development, learning about exceptions in the demand curve, such as Giffen and Veblen goods, can offer valuable insights for making informed investing decisions in the business world.
- Understanding these exceptions, like the kink in the demand curve that occurs in the oligopoly model, can also aid in skills-training for future financial analysts in education-and-self-development programs.
- Furthermore, exploring factors causing changes in demand, such as consumer expectations and emergencies, can help in establishing effective business strategies and financial planning.
- References like Microeconomics: Principles and Applications by Berry and Microeconomics by Mankiw can provide a comprehensive education on the demand curve and its exceptions, enhancing one's understanding of economics and business overall.
