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Law of demand

51 bytes added, 17:33, 7 May 2011
Apparent counterexamples
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! Name of counterexample !! Necessary conditions !! Description of counterexample !! Which of the other [[determinants of demand]] is affected? !! Empirical evidence?
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| [[Giffen good]] || [[inferior good]], should form a significant but not overwhelming fraction of household budget, there should exist other superior but more expensive goods || This is an [[inferior good]] for which the price-elasticity of demand is positive, even though the desirability of possessing the good ''decreases'' with an increase in price. The increase in demand is explained by the fact that the good consumes a sizable fraction of the consumer's income and hence, the income effect forces the consumer to shift away from higher-quality, more expensive alternatives towards consuming even more of the good. || '''Income''': The explanation for the Giffen effect is that an increase in price in this case leads to a ''decrease'' in effective income (which is one of the exogenous determinants of demand), which, combined with the [[inferior good]] nature, increases demand.
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| [[Veblen good]] || good should be something that conspicuously displays status or wealth || Increase in price leads to an increase in the desirability of possessing the good, thus leading to an increase in demand, typically explained by [[conspicuous consumption]] -- consumption done primarily for the purpose of displaying income or wealth. The larger the price, the better the consumption of the good may be as a way of showcasing income and wealth. || '''Tastes and preferences'''
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| Price as a quality signal || hard to judge quality directly || In some cases, particularly for [[credence good]]s, where the buyers have no direct way of judging the usefulness of a good, the price of a good may be taken as a signal of its quality. A low unit price may be viewed as a signal of poor quality and a high unit price may be viewed as a signal of high quality. This is similar to, but not quite the same as, the situation with a Veblen good -- here, the higher price does not directly increase the desirability of possessing the good but rather is being used as a signal of other information. If the quality information were available directly, then the higher price would not increase the quantity demanded. || '''Information about quality'''
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