When Higher Price Equals Higher Demand

Recently, a lot of recent political and business discourse has hinged on common sense notions of supply and demand—erring on the side of over-reliance on an appeal to reason that can lead to mistaken logic.

The law of demand posits an inverse relationship between price and quantity demanded—when the price of a good goes up, the demand for the product goes down, and vice versa. It’s important to emphasize that this general principle is not absolute, which is to say that there are exceptions to the rule.

Let’s examine several exceptions to the law of demand, illustrated here:

Supply and demand chart image
According to the law of demand, price and quantity are inversely related.

Meet Thorstein Veblen

Thorstein Bunde Veblen, an American economist and sociologist who coined the term ‘conspicuous consumption,’ leant his name to Veblen goods—which defy the law of demand. The Veblen effect explains how Veblen goods, or ‘positional’ goods, become less desirable (lower demand) when their price decreases, since their status symbol shine diminishes as they become more affordable.  For these types of goods, the reverse also holds true—higher prices coincide with greater demand.  Does this kind of conspicuous consumption ‘make sense’? Probably more than North Korea’s latest fad, buying refrigerators to store things like books since the power supply proves so unreliable.

Pinching pennies

Counter-examples to the law of demand are not reserved to the upper echelons of society. Economically-challenged individuals or lower income households can violate the law of demand when the price of basic goods (staples) increases, since they offset the price rise by cutting back on other less essential purchases. This concept comes from British economist Alfred Marshall, who attributed the idea to Scottish statistician and economist Sir Robert Giffen. He wrote:

As Mr.Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises the marginal utility of money to them so much that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.”

Alfred Marshall, Principles of Economics (1895 ed. III.VI.17).

So not only does bread purchases make up a larger portion of the poor family’s’ budget–the family actually buys a greater amount than before in order to keep their stomachs full.

Buying ebooks

In The Secrets to Ebook Publishing Success, Mark Coker notes that a whole segment of ebook buyers steer clear of works at the lowest price point range ($0.99 to $1.99) because they judge low priced ebooks to likely be of lower quality than higher priced ones. He writes “lower prices generally resulted in more unit sales, with the exception of the $1.99 price-point, which appears to underperform.”

A blip in the ebook demand curve at the $1.99 price point. In theory, this should be a negative sloping line.

Aside from this one anomaly, his data showed consistency with the law of demand.  I’m not sure if there’s an economics term for this particular phenomenon.

It’s the counterexamples, stupid

While the actual requirements for a commodity to qualify as a Giffen good are strict enough to make their existence a subject of debate among economists, the fact that counterexamples to the law of demand exist at both the high and low ends of the price spectrum is telling. The ebook example shows that with real data under the microscope, the real picture may surprise you. Commentators who want to rely on the law of demand as absolute truth may rely too heavily on the general principle to support their argument—opening their claims to legitimate challenge. The lesson for content marketing folks is to be careful about how you use common sense arguments to build stories/prove points.

What do you think? Do you know of other ‘common sense’ claims that are over-used or used inaccurately?