Question

What is the standard neoclassical understanding of demand for a commodity? How does a Veblen good challenge this understanding? Use one of the features of the political economy approach to explain. (Answer in 5-6 sentences.)

Answer 1

The neoclassical school talks about the law of demand which states that price and quantity demanded of a good have an inverse relationship. However, this theory is contradicted by certain goods which are classified as Veblen goods. These goods indicate abnormal market behavior where consumers purchase the higher-priced goods even when similar low-priced (but not identical) substitutes are available. It is caused either due to the belief that higher price means higher quality, or for conspicuous consumption (to be seen as buying an expensive, prestige item).  "Conspicuous consumption" often resulted in "conspicuous waste", which Veblen detested. This goes hand in hand with political economy which studies how economic theories such as capitalism play out in the real world and bring about phenomena like the Veblen effect.