Veblen good

(noun)

A good for which people's preference for buying them increases as a direct function of their price, as greater price confers greater status.

Related Terms

Examples of Veblen good in the following topics:

  • The Law of Demand

    • If the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in quantity of good demanded by the consumer will be negatively correlated to the change in the price of the good or service.
    • Though in general terms and specific to normal goods, demand will exhibit a downward slope, there are exceptions: Giffen goods and Veblen goods
    • A Giffen good describes an extreme case for an inferior good.
    • example of a Giffen good, though a popular albeit historically inaccurate example is the purchase of potatoes (an inferior good) as prices continued to increase during the Irish potato famine.
    • These goods are known as a Veblen goods.

  • Market Demand

    • The demand schedule represents the amount of some good that a buyer is willing and able to purchase at various prices.
    • In general, this means that the demand curve is downward-sloping, which means that as the price of a good decreases, consumers will buy more of that good.
    • A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at every different price.
    • However, special cases exist where the preference for the good or service may be perverse.
    • Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods (an inferior but staple good) and Veblen goods (goods characterized as being more desirable the higher the price; luxury or status items).

  • Willingness to Pay and the Demand Curve

    • In general as the price of a good increases, the quantity demanded of that good decreases.
    • Veblen goods are expensive luxury products, such as designer handbags and high-end cars.
    • Giffen goods are very rare and are defined by three characteristics:
    • It is an inferior good, or a good for which demand decreases as consumer income rises,
    • In this instance, bread is a giffen good.

  • Defining Price Elasticity of Demand

    • The price elasticity of demand (PED) measures the change in demand for a good in response to a change in price.
    • The law of demand states that there is an inverse relationship between price and demand for a good.
    • Only goods that do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED.
    • The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one.
    • This means that demand for a good does not change in response to price .

  • Economic Way of Thinking

    • When Pi = price of good i, B = Budget, Qi = Quantity of good i
    • The producers (sellers) of a good should continue to produced and sell more of a good so long as the P > MC.
    • Thorstein Veblen (1857-1929) is regarded as the founder of the Institutionalist school of economics.
    • Veblen "develops the idea that institutions are inhibitory and backward looking, while science and technology are themselves dynamic and oriented toward change" [Tilman, A Veblen Treasury, page xxiii].
    • Tilman finds five ideas in Veblen that are representative of his contribution:

  • References

    • Worldly Goods: A New History of the Renaissance, Doubleday: New York, 1996.

  • Demand for Public Goods

    • The aggregate demand for a public good is derived differently from the aggregate demand for private goods.
    • The marginal benefit of a public good diminishes as the level of the good provided increases.
    • Public goods are non-rivalrous, so everyone can consume each unit of a public good.
    • The aggregate demand for a public good is the sum of marginal benefits to each person at each quantity of the good provided .
    • Unlike public goods, society does not have to agree on a given quantity of a private good, and any one person can consume more of the private good than another at a given price.

  • Defining a Good

    • Private goods: Private goods are excludable and rival.
    • Common goods: Common goods are non-excludable and rival.
    • Club goods: Club goods are excludable but non-rival.
    • This type of good often requires a "membership" payment in order to enjoy the benefits of the goods.
    • Public goods: Public goods are non-excludable and non-rival.

  • Cross-Price Elasticity of Demand

    • For substitute goods, as the price of one good rises, the demand for the substitute good increases.
    • Conversely, the demand for a substitute good falls when the price of another good is decreased.
    • Two goods that complement each other have a negative cross elasticity of demand: as the price of good Y rises, the demand for good X falls.
    • Two goods that are substitutes have a positive cross elasticity of demand: as the price of good Y rises, the demand for good X rises.
    • Two goods that are independent have a zero cross elasticity of demand: as the price of good Y rises, the demand for good X stays constant.

  • Optimal Quantity of a Public Good

    • Unlike the market demand curve for private goods, where individual demand curves are summed horizontally, individual demand curves for public goods are summed vertically to get the market demand curve.
    • Often, the government supplies the public good.
    • The supply curve for a public good is equal to its marginal cost curve.
    • The public good provider uses cost-benefit analysis to decide whether to provide a particular good by comparing marginal costs and marginal benefits.
    • The optimal quantity of public good occurs where MB = MC.