User:Jackftwist/Veblen and Giffen goods -- some comments

This subpage expands on a point I raised on the Talk page for the main article on price elasticity of demand. That article provides links to many of the related Wikipedia articles that also discuss Veblen and Giffen goods, and those articles in turn provide other links. I welcome your comments on and criticisms of the following discussion.

Most (all?) of the Wikipedia articles related to the Law of Demand and price elasticity of demand prominently note that Veblen and Giffen goods are exceptions to that law. In a few instances, the articles digress so much from their main topic into a discussion of these exceptions that it may cause the reader to focus too much on the exceptions and too little on the main point, namely that the Law of Demand accurately describes consumer behavior for the overwhelming majority of typical goods and services. By devoting so much attention to these exceptions, the authors of these articles unintentionally detract from their article's primary purpose.

In reality, Veblen and Giffen goods are exceptionally rare anomalies to "normal" consumer behavior, so rare that many well-established economics textbooks (especially those at the introductory level) don't even mention them at all! Even when they are mentioned in textbooks, that discussion is often relegated to a footnote or, at best, a separate section at the end of the chapter, after having covered all the essential, fundamental properties of the main subject that consumers encounter in the vast majority of their economic decisions -- the Law of Demand, price elasticity of demand, etc.

Because Veblen goods are glamorous, bling-y luxury items (that most of us would never be able to afford anyway!), they especially tend to distract students and other Wikipedia users from the fundamental principle of consumer behavior described by the Law of Demand. In addition, as the article on Veblen goods points out, the demand curve for those goods is upward sloping only over certain price ranges. Eventually, when the price gets high enough, the Law of Demand sets in, i.e., the demand curve will slope downward. (Once that happens, it raises the question of whether the goods still qualify as Veblen goods!) The reason for this is simple: as the already extraordinarily high price of a Veblen good continues to rise, eventually some of even the wealthiest potential buyers will decide the good is no longer worth its opportunity costs -- e.g., the other luxury goods and services they could spend the money on. As the price gets even higher, so many consumers in the market for the Veblen good would eventually drop out that the quantity demanded would fall. I.e., the Law of Demand would take over.

In addition, consider the counterfactual case: if the Law of Demand didn't eventually take over, even the wealthiest consumers would spend so much on Veblen goods that they would eventually begin to exhaust their incomes, leaving them less and less to spend on the "ordinary" luxury items they also demand. Even the wealthiest consumers eventually face a budget constraint, albeit an extravagant one!

Auctions for high-end art, fine antiques, celebrity memorabilia, and the like, many of which would qualify as Veblen goods, provide excellent examples that budget constraints eventually force everyone to behave as the Law of Demand predicts. Even though a masterpiece by Picasso, Monet, Gainsborough, etc. may sell for many millions of dollars, as the price is bid higher and higher, more and more bidders drop out, until eventually the bidding stops because all the other bidders have decided they aren't willing to bid any higher, no matter how much they would like to have the painting.

(NOTE: I'll add some brief comments on Giffen goods soon.)

--Jackftwist (talk) 19:40, 30 March 2010 (UTC)