The law of demand states that the quantity demanded for a good has an inverse relationship to its price. This is self-explanatory if we look at a general example of a bar of chocolate. At a high price, few people will want to buy a bar of chocolate, but equally that same bar of chocolate at a low price will mean that many people will want to buy it.
This rule stays the same for the vast majority of goods and services in the global economy from chocolate bars, to legal services, to the production of automobiles and undermines the fundamentals of economics. However, this may not always be the case.
Why is it that we find rappers and sports stars bragging about their jewellery, their clothes, their cars amongst a plethora of other things? The main reason behind this is that these goods act as a status symbol to the party who has purchased them. For an item to be a status symbol it must show that the owner is someone who wants to be seen as wealthy, and the only way an item is able to do this is with a large price tag.
Hence, we find cars that are sold for millions of pounds, enough money for a regular family to buy their house outright and still have money left over. Would the Jay-Zs and Conor McGregors of our world buy your regular family’s Ford Mondeo? They fulfil the purposes they require, being reliable at getting you from point A to point B and suit the clear majority of the world. However, we are more used to Jay Z showing off his car collection of Rolls Royces, Ferraris and Porsches. These vehicles fulfil the same purpose but act as status symbols.
A status symbol only works if it is exclusive. Owning a Rolex is special because it puts you in a limited group of people who have the potential to buy a Rolex and it does this through the high price tag it commands. If a Rolex was cheaper then the reputation and status behind it disappears. Hence this is why we see watches, cars and other luxury goods with price tags and high demand from the wealthy that break the fundamental laws of economics. These goods are known as Veblen goods and are an anomaly to the expectations of society. Veblen goods include the most expensive items and cater to the most well off in society. Further examples include Vintage Don Perignon, Louis Vuitton bags and everything for sale in Rodeo Drive in Los Angeles.
A similar concept can also be seen with Giffen goods. The good sees the positive relationship between price and demand due to the income effect of the higher price outweighing the substitution effect. However, Giffen goods are even less known than Veblen goods as their concept is limited to the poorest of societies with limited choices of good, and even then, there are some economists who do not consider them to exist.
The idea is that if you have a staple good, let’s say bread, and the price increases we expect that fewer people buy the good. However, if you were in a society where there were limited substitutes for the staple bread you would be forced to cut consumption of other more luxury foods as your disposable income (income after all necessities have been paid for) has reduced. This means that you are forced to buy more bread as it is still the cheapest foodstuff available to compensate for your reduced ability to buy the luxury item which means that the increases in price have increased the demand.
Veblen and Giffen goods cover such a small portion of the goods and services of the economy that they are largely ignored by economic models. Yet it is still important to be aware of these anomalous goods that may or may not even exist in the case of Giffen goods.