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How Do You Explain the Upward Sloping Demand Curve?

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Broken Window posted on Sat, Aug 29 2009 3:52 PM

I know I'm not the first one to consider this, but I still don't understand the answer. I'm sure there are other scenarios that could be used to illustrate, but the one I'm thinking of is someone in the market for a high ticket item, say some type of antique collectible. If the dealer sets the price at, let's say $20,000 the customer doesn't buy, but if he sets the very same item at $85,000 he does buy.  

Joseph Salerno addresses this in his lecture on How Prices Are Determined, and I believe he says (I hope I'm getting it right) it's not a violation of the Law of Demand the reason being that we're not talking about movement along a single demand curve,  but rather a shift in demand -an entirely new demand curve.  (I have nothing but respect and admiration for Mr. Salerno, so this is nothing against him).

I just don't understand this because if you plotted the scenario I described  on a graph, it would slope upward:  $20,000 = 0 items sold ,  $85,000 = 1 item sold.  

Thank you

 

Disclaimer: Layperson - don't assume anything I say  on economics is true.

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what rational consumer wouldn't buy something he's willing to pay 85,000 for at 20,000? That's a little odd. Is it a charity auction?

 


"We must not let our rulers load us with perpetual debt. We must make our election between economy and liberty or profusion and servitude." - Thomas Jefferson

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Suggested by Arvin

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.

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its keepin up with the Joneses

do we get free cheezeburger in socielism?

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Suggested by Arvin

Maybe omit graphs completely and try and understand Salerno's point without them.

Freedom of markets is positively correlated with the degree of evolution in any society...

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Arvin replied on Sun, Aug 30 2009 6:28 AM

Jon Irenicus:

Maybe omit graphs completely and try and understand Salerno's point without them.

Exactly, I call for the abolition of supply/demand curves in AE. :D

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This is similar to the "problem" giffen goods cause. If you try understand it through graphs and not through Austrian value theory it causes many problems. I emailed Salerno, Block and Murphy on this, and they agreed with me that though the Austrian school and neoclassical economics share the STV/MUTV, the way they derive and formulate it is different, meaning problems for the neoclassical approach do not necessarily plague the Austrian approach. Block was going to do a paper on this. I wonder if he's published it yet. I'll see if I can quote some of the answers Salerno gave here as well as find Block's paper (Garrison has one too, I'll put it up later.)

Freedom of markets is positively correlated with the degree of evolution in any society...

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Suggested by Jon Irenicus

It's possible to understand it with demand curves, although difficult. Imagine numerous different demand curves each one slightly to the right of the previous one. As you increase the cost being paid for the "good" (technically goods) you shift onto an entirely new demand curve to the right. If you joined up the points on each of the curves, the new "demand curve" you would be left with would have a positive gradient.

It might also help if you consider the painting or whatever else to be a durable consumer good. At extremely low prices the painting will give the owner utility only as a result of its asthetic appeal. As the price increases, the good will also give yield in the form of prestige or whatever else. I'll play around with paint later and try to make it easier for you to imagine what I'm explaning. But as an analogy think of graphs depicting the relationship between the price level and output in the long run a short run. The long run curve, usually seen as vertical, is the aggregate of the short run curves. In the same way, this demand curve would just be the aggregate of numerous normal demand curves.

 

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I appreciate all the responses.  Maybe I could revise the question:  It's not the graphical representation I  really care much about, but rather the seeming violation of the graphs' underlying principle-- the Law of Demand.  It  states the higher the price, the lower the quantity demanded, and vice versa., yet the case I illustrated seems to go against this. 

GilesStratton, is there a way of explaining  your first paragraph less technically?  I'm just a layperson. Again, it's not really the graphs that I care about.

JonIrenicus, I have thought quite a lot about what Salerno said; I thought I understood it when I first heard him explain it, but like that episode of Star Trek where McCoy gets knowledge zapped into his brain so he can perform a brain transplant on Spock, but then loses the knowledge mid-operation,  that's kind of the feeling I'm having with this the more I think about it, lol .  

Edit:  G.S.,  I get what you're saying now, no need to explain it over.   But I still don't understand how a  lower quantity being sold at the lower price and vice versa, is not violating the Law of Demand.

 

 

Disclaimer: Layperson - don't assume anything I say  on economics is true.

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If somebody tried to sell you a Rolex for $50, you likely wouldn't take it since you would have likely concluded it was fake based on the knowledge of how much those things go for; similar forces are work with the painting.

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Suggested by Jon Irenicus

the law of demand keeps the good in question constant. what you are considering are two different goods.

just as a car that is more fuel efficient might command a lower price than one which is less efficient.

for a car that is only differentiated in your subjective evaluating mind by your belief that the ladies will find you more attractive in this one than that one; you will be willing to pay a somewhat higher price for it. it is not the same good as the other car that you dont have that belief about. similar with the painting in question.

a painting that by ones ownership of it signals meritous qualities to 3rd parties about its owner, assuming that this signalling is subjectively valued by a would be owner, might command a higher price than a painting without this quality.

 

 

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Vitor replied on Sun, Aug 30 2009 9:32 AM

Gibson (the guitar company) raised the prices of their guitars, arguing that this move would make them more desirable. Well, at least to me, it just made them look like snoob pricks. 

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JonIrenicus, I have thought quite a lot about what Salerno said; I thought I understood it when I first heard him explain it, but like that episode of Star Trek where McCoy gets knowledge zapped into his brain so he can perform a brain transplant on Spock, but then loses the knowledge mid-operation,  that's kind of the feeling I'm having with this the more I think about it, lol . 

I think NirgUK outlined the answer I'd give quite well, more or less putting the response I am going to quote from Salerno if he lets me in simple language. The law of demand holds ceteris paribus. I still want to quote from Salerno and link to some papers on this because it's very important to grasp how the Austrian position differs from the mainstream position even though they're commonly hold as differing in little but methodological justification.


Giles, that'd be useful.

Freedom of markets is positively correlated with the degree of evolution in any society...

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I think I get it now. It is two different goods because the   higher price tag is functioning as an attribute --just like any other-- that imparts the good with greater perceived value-- the same as if greater value were imparted by it having  been signed by the artist as opposed to unsigned, having been from the artist's golden period as opposed to not, or one in a high state of preservation, as opposed to one in a poorer condition etc, etc.  The fact that it happens to be the price tag that is imparting greater value is irrelevant, but it does confuse the issue because a higher price is not an attribute as readily identifiable as such. So, in the example I referenced,  the item with the $85,000 price tag would indeed sell more units if lowered to $20,000- consistent with the law of demand.  The "same" item ('same' in quotes because it is not the same item)  with the $20,000 initial price tag   is a different good altogether.

Disclaimer: Layperson - don't assume anything I say  on economics is true.

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Yep, exactly.

Freedom of markets is positively correlated with the degree of evolution in any society...

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