How can upward sloping demand curves exist given that consumer surplus will always be negative?
So, why would a person ever buy a positive quantity?
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1$\begingroup$ Veblen goods - goods whose high price is taken to indicate quality or to confer status on the purchaser - are sometimes said to have upward sloping demand curves. However, this appears to be contentious - see for example this explanation which offers an alternative analysis in terms of shifting to the right of a downward sloping demand curve. $\endgroup$– Adam BaileyCommented Jan 3, 2022 at 20:53
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$\begingroup$ There is more to this question than meets the eye. It seems that consumer surplus just is not defined for badly-behaved demand curves. But there are some plausible definitions you can choose. In fact, this question has already been answered here: economics.stackexchange.com/questions/34379/…. 1mufflon1 defines consumer surplus as only the area above the equilibrium price, so consumer surplus is always positive. But I suppose, you may also define it as the difference in the area, above and below, in which case, if the price is high $\endgroup$– Shaikh AmmarCommented Jan 5, 2022 at 8:20
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$\begingroup$ [this is rest of Shaikh Ammar's comment] enough, the consumer surplus will be negative. You may also be interested in: Can consumer surplus be negative if a consumer is forced to make a purchase?. I have not been able to figure out a valid interpretation of this definition, but food for thought, I suppose. Of course, which definition you choose depends on what you want to analyse, and how you wish to interpret it. It seems there really is not any strict answer in this case. $\endgroup$– 1muflon1 ♦Commented Jan 5, 2022 at 11:40
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$\begingroup$ @AdamBailey Please see this answer: economics.stackexchange.com/a/54899/11824 This answer offers a comprehensive solution that takes into account two different perspectives. On one hand, it considers the aggregate view where a change in price results in a change in demand through both changes in preferences and the standard effect seen in aggregate, as reflected by the upward sloping demand curve. On the other hand, we can also examine the effect separately by analyzing the impact of changes in preferences (due to price change) through a separate shift in the demand curve. $\endgroup$– AmitCommented Mar 31, 2023 at 15:23
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3 Answers
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Upward sloping demand curves are rare but they can exist for a class of a good that is called Giffen good.
Upward sloping demand can exist because price of a good or service has two effects:
- Substitution Effect: Higher price of a good means that people will rather buy something else.
- Income Effect: Higher price means peoples budget constraint is tighter.
Now as you can learn from any 101 econ course there are two major types of a good:
- Normal Good: Good for which income elasticity is positive (you have higher income you buy more of it e.g. taxi rides).
- Inferior Good: Good for which income elasticity is negative ( you have higher income you buy less of it e.g. public transport).
Now Giffen goods are special type of inferior goods where price has income effect that dominates the substitution effect. Thus increase in price will decrease peoples income (indirectly by making their budget constraint more binding) so much that they might consume more of that good because it is an inferior good and the income effect simply dominates the substitution effect.
For example, generally speaking in poor countries meat is normal good whereas some staple like rice is inferior good. If price of a rice increases people might end up consuming more of it because increase in price means they are de facto poorer (their budget constraint is more biding), rice in some countries have only few or none close substitutes so substation effect of higher price might be trivial. In that case you can observe upward sloping demand for a good.
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6$\begingroup$ Just to add to 1mulfon1's answer. Some people would claim that Giffin goods don't exist in real life. There is one notable paper that showed their existence: jstor.org/stable/29730133?seq=1#metadata_info_tab_contents $\endgroup$ Commented Jan 3, 2022 at 13:56
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1$\begingroup$ I understand this but I was looking for a consumer surplus analysis. Is it possible? $\endgroup$– PolimeCommented Jan 4, 2022 at 14:16
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1$\begingroup$ @Polime consumer surplus analysis of what? Demand is not given by consumer surplus, higher consumer surplus does not translate into higher demand and vice versa. Consumer surplus is zero even in regular case of completely elastic demand, or in case of 1st degree discriminating monopolist and yet demand is nonzero $\endgroup$– 1muflon1 ♦Commented Jan 4, 2022 at 14:38
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Becker, G. S. (1991). A note on restaurant pricing and other examples of social influences on price. JPE.
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1$\begingroup$ +1, but it would be helpful if you would add some text explaining the picture, not every person on this site will understand them. I have hard time following them $\endgroup$– 1muflon1 ♦Commented Jan 5, 2022 at 22:09
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Consider the following (non-standard) utility maximisation problem : \begin{eqnarray*} \max_{x, y} \ & x^{p^2}y \\ \text{s.t.} \ & px+y\leq M\end{eqnarray*} Here, $0 < p < 1$ is the price of commodity $X$. In this situation, we can think of $X$ as a Veblen good. Solving this problem, we get the demand for $X$ as: $x^d(p, M)=\left(\frac{p}{1+p^2}\right)M$ which is an increasing function of both price $p \in (0, 1)$ and income $M$. So, it is not a giffen good, but still has a demand that is increasing in price.
Related Answer: https://qr.ae/pveKFJ
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$\begingroup$ Please note that these are the definitions I have used in the answer: A good is said to be inferior if its demand is a decreasing function of income. An Inferior good is said to be Giffen if its demand is an increasing function of its price. $\endgroup$– AmitCommented Apr 15, 2023 at 10:57