How Do You Explain the Upward Sloping Demand Curve?

[david_z]

@Jake McCloskey

It’s called a Veblen good. The idea is that people judge the value of certain goods based on their price. A good of higher price might be considered higher quality than a lower priced good. How to work this into the law of demand is a matter of defention but the concept is entirely valid.

I’d like to expand on this point for the OP. Prices convey information about a product. It might be the case that $20,000 is too low, or lower than one would reasonably expect for the particular item. If potential buyers heed this, they will ask themselves, “What the seller not telling me about this product? Why is he charging such a low price?” They may conclude that the seller is hiding some information which might otherwise cause the buyer to reject the offer.

One anecdotal example - and an extreme one at that - is the market for puppies. I’ve heard that if your dog has a litter and you need to get rid of them, offering them “Free to a good home” is worse than attaching some nominal price, like $50. People are averse to free or cheap in some instances…

[Jon_Irenicus]

Here’s the bit from Salerno:

I think Matt is on the right track here. The concept of a Giffen good
makes sense only within the neoclassical framework of partial equilibrium
analysis. An unexplained change in the price of a given good is posited in
what is essentially a barter economy and an answer is sought to the
question of what the effect would be on the quantity demanded of the good,
ceteris paribus. In Mengerian causal-realist analysis both the analytical
framework and the question asked are radically different. Price changes
are seen as the outcome of the deeper causal forces of value scales and
existing stocks of the various goods and of money and of the (anticipated)
purchasing power of the latter. At a given moment in time, the structure
of prices and the purchasing power of money are determined by the
interaction of all market agents’ individual value rankings of the
currently existing supplies of goods and money balances (taking into
account speculative anticipations of changes in prices). The question is
then posed: What would happen if the supply of a single good were to
change, say increase, ceteris paribus? Since the causal-realist economist
is interested in isolating the complete adjustment process of an individual
change, the ceteris paribus qualification is construed as precluding any
other AUTONOMOUS change in the economic data until full adjustment of the
overall economy has been made to the change in supply of the good in
question. Assuming that the good is well short of the margin of full
satiation of at least some consumers’ wants, the additional units must
cause a decrease in marginal utilities of the good and result in a fall in
its price and an attendant increase in its quantity demanded on the market.
This is true always and everywhere and for all goods. Giffen goods, in the
Marshallian-neoclassical sense, play no role in Mengerian causal-realist
analysis, because the focus of analysis is always on the underlying
factors determining real money prices. Analyzing an uncaused change in the
price of a good–what neoclassicals call in another context an “individual
experiment”–is mental gymnastics and analytically meaningless.

None of this is meant to deny that the series of endogenous changes in the
demand curves and prices of related goods (substitutes and complements),
in the purchasing power of money and in the distribution of wealth induced
by this change in supply of a given good may cause some low-income people
as well as others to purchase less of the good at the lower price than they
did at the higher price in the new final equilibrium. But this is hardly
evidence that demand curves can ever be upward sloping. Rather it is an
illustration of the fact that all prices are interconnected and that every
single change in the fundamental economic data brings about a “revolution”
in the structure of demands, incomes and prices.

For a causal realist analysis of demand curves, I recommend the relevant
chapters of Wicksteed’s Common Sense of Political Economy; Arthur Marget’s
Theory of Prices; and Rothbard’s Man, Economy and State, esp. pp. 280-288
(Scholars Ed.)

He was gracious enough to let me share his knowledge with you. Also, I’d take a look at this. I’ll ask Block if I can link his paper as it’s not published.

[fsk]

That fallacy doesn’t occur if people are able to figure out on their own what something is worth.

Some people just want to buy something expensive, regardless of quality.