Question

Please provide insights on the following by entering ONLY A TYPED RESPONSE because handwritten responses are hard to read. Thanks

Economists generally believe that demand curves have a negative slope. Yet, there is some evidence that in some rare cases we might possibly see a positive relationship between the price and the quantity demanded of a specific good. Economists have outlined two different scenarios under which this might possibly happen:

(i) It has been argued that this might occur in case of a specific kind of inferior good, also known as a Giffen good (see Wikipedia: https://en.wikipedia.org/wiki/Giffen_good ). For example, during the great Potato Famine in Ireland, the argument was that when the price of potatoes rose, the poor were no longer able to buy anything else (such as beef or fish), so they bought more potatoes when the price of potatoes went up.

(ii) It has also been argued that this may happen if and when consumers believe that prices are indicative of quality. This would be most likely if the consumers have limited understanding of the specific good in question. Thus it has been argued that, in some cases, if a perfume is too cheap fewer people might buy it regardless of how it might smell, etc.

In this context, write a short essay on the possibility of positively sloped demand curves. What do you think will happen in terms of supply and demand if the demand curve is positively sloped? How likely do you think that either of the above listed scenarios is? Do you believe that either of these scenarios could be long lasting? Why or why not?

Answer 1

A positively or the upward sloped demand curve denotes that as the price of the goods will rise the quantity demanded of the goods will also rise. However in the normal conditions the demand curve is downward sloping denoting the inverse relationship between the price and the quantity demanded by the consumer. But the demand curve can be positively sloped in the following conditions -

In case of the giffen goods

In case when the consumers have preferences of brands

Giffen goods are the type of the inferior goods whose demand increases with the increase in the price of the commodity. The demand of these goods does not depend on the decrease in the price of the commodity. The example holds good in case of the coarse grains such as the jawar, bajra, millets. The demand curve of these is upward sloping.

The second is the case when the consumer is brand sensitive. The consumer purchases that item whose brand name is big and expensive and does not face the downward sloping demand curve.

In such cases the demand increases with the increase in the price of the commodity and the supply also increases accordingly. The supply curve does not lose its tendency to be positively sloped.

To be considered as the long term factor , when the consumer thinks that the prices are indicative of quality the phenomenon of the positively sloped demand curve will be long term. Because such kind of tendency mostly exits in the luxury class people and they tend to purchase the expensive items going on its quality and not the price.