Why In The Vast Majority Of Cases Is There An Inverse Relationship Between Price And Essay, Research Paper

For normal goods the demand for X varies inversely with the price of X. There are two main reasons for

this.

For any price change there is a substitution effect and an income effect. For example if the price of

Tesco Steak falls, some consumers will switch towards Tesco steak (away from other brands or other

meats) – because it has become relatively cheaper. More utility can be gained from each pound spent.

This switching of demand is called the substitution effect.

If the price of steak falls, consumer can now afford to buy more with their income/budget. We say that

their real income has increased (they can buy a bigger quantity of steak per week or per month).

Providing that the good has a positive income elasticity of demand, the income effect will also cause

the consumer to buy more Tesco steak when the price falls.

In this case the income and substitution effects are both working in the same direction. Demand will

rise when price falls.

The same relationship holds for an inferior good except that the income effect causes consumers to buy

less when the price falls. However the substitution effect is assumed to be greater so demand stil

expands at a lower price (and contracts at a higher price)

Some goods are said to ignore the normaly law of demand. We are talking here of Giffen Goods and

Veblen Goods. These are very different types of products. Giffen Goods are strongly inferior. Veblen

goods are sometimes known as goods or services of ostentatious consumption. Here demand rises with

price if the market price is taken to be a sign of quality or where consumers are more concerned with the

satifsaction gleaned from other people seeing them consuming expensive products. designer clothes and

the Jim Keefe revision guide to A-Level Economics spring readily to mind as good examples to use.