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Shifts in the Demand Curve Caused by Changes in the Conditions of Demand.





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Giffen goods

As noted earlier, if there is an inferior good of which the positive income effect is greater than the negative substitution effect, the law of demand would not hold. For example, when the price of potatoes (which is the staple food of some poor families) decreases significantly, then a particular household may like to buy superior goods out of the savings which they can have now due to superior goods like cereals, fruits etc., not only from these savings but also by reducing the consumption of potatoes. Thus, a decrease in price of potatoes results in decrease in consumption of potatoes. Such basic good items (like bajra, barley, grain etc.) consumed in bulk by the poor families, generally fall in the category of Giffen goods. It should be noted that not all inferior goods are giffen goods, but all giffen goods are inferior goods. This is similar to how all men are humans but not all humans are men. A walkman is considered an inferior good but would not be a Giffen good.

Commodities which are used as status symbols

Some expensive commodities like diamonds, air conditioned cars, etc., are used as status symbols to display one’s wealth. The more expensive these commodities become, the higher their value as a status symbol and hence, the greater the demand for them. The amount demanded of these commodities increase with an increase in their price and decrease with a decrease in their price. Also known as a Veblen good.

Expectation of change in the price of commodity

If a household expects the price of a commodity to increase, it may start purchasing greater amount of the commodity even at the presently increased price. Similarly, if the household expects the price of the commodity to decrease, it may postpone its purchases. Thus, law of demand is violated in such cases.

In the above circumstances, the demand curve does not slope down from left to right instead it presents a backward sloping from top right to down left as shown in diagram. This curve is known as exceptional demand curve.

 

6. Yes, the goods of the high quality may be at the same time Giffen goods. For example, the products by “Apple” company.

Shifts in the Demand Curve Caused by Changes in the Conditions of Demand.


Changes in any of the factors other than price cause the demand curve to shift. Changes in the price of the good itself cause a movement along the demand curve.

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