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Macroeconomics

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“The Law of Demand states that the demand for a product is inversely related to the price of such product. This implies that quantity demanded increases when price decreases. Is this always true?” This isn’t always true. In these cases it would be a shift in the demand curve. The demand curve will shift when non-price factors exist. There are a number of factors that show that the law of demand doesn’t apply. One exception is Giffen goods. According to Bannock (2003), “a Giffen good is a good where an increase in price of a basic item leads to an increase in demand.” The author also gives an example of the poor in nineteenth century and the price of bread where they still bought more bread despite its higher price. If inflation and high interest rates occur then money would also be an example of this due to an increase in demand making the price of money rise. Another exception is Veblen goods, which are types of luxury goods that are in demand because of the high prices asked for them. An example of these goods is jewelry (Diamonds), luxury cars (Tesla/Rolls Royce), luxury handbags (Michael Kors/Prada/Kate Spade). This type of good is wanted for the status and as these prices goes up so does the demand. Starbucks Coffee would be a Veblen good according to Piong due to its status-enhancing brand. Another factor is inelastic goods, which is when demand does not change even when prices change. An example of this would be necessary medication like insulin in which the price would have no effect on demand since a person would have to have it regardless of price. A rare painting like the Mona Lisa or Starry Night would be considered an inelastic good that demand would remain unchanged regardless of price since it was the only one produced. The final example would be gas since your demand wouldn’t change even when price changes because you would still drive the same miles to get to work. However one could argue that some of these goods in the short run can’t be reduced but in the long run you could make changes or substitutions thus changing the factor shift and curve.
The many factors that affect demand are income, inflation, wealth, and interest rates.

References:
Giffen Good. (2003). In G. Bannock (Ed.), The new penguin Business Dictionary. London, United Kingdom: Penguin. Retrieved from http://libproxy.edmc.edu/login?url=http://literati.credoreference.com.libproxy.edmc.edu/content/entry/penguinbus/giffen_good/0

Eaton, B. C., & Eswaran, M. (2009). Well-being and Affluence in the Presence of a Veblen Good. Economic Journal, 119(539), 1088-1104. doi:10.1111/j.1468-0297.2009.02255.x

Piong, C. (2013). Starbucks coffee as a Veblen good: Perceived status enhancement, brand involvement, and brand loyalty (Order No. 3571839). Available from ProQuest Dissertations & Theses Global. (1433075204). Retrieved fromhttp://search.proquest.com/docview/143307520994?accountid=348

Source: Boundless. “The Law of Demand.” Boundless Economics. Boundless, 21 Jul. 2015. Retrieved 25 Sep. 2015 from https://www.boundless.com/economics/textbooks/boundless-economics-textbook/introducing-supply-and-demand-3/demand-46/the-law-of-demand-169-12267/

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