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Microeconomics:Leibenstien's analyses of sonb, bandwagon and Veblen effects are important because they demonstrate that the so-c - Essay Example

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WHY THE 'LAW' OF DOWNWARD SLOPING DEMAND IS WRONG ACCORDING TO LEIBENSTIEN'S ANALYSES OF SNOB, BANDWAGON AND VEBLEN EFFECTS By Institution Date Why the 'law' of downward sloping demand is wrong according to Leibenstien's analyses of snob, bandwagon and Veblen effects The law of demand asserts that holding all other factors constant, the demand of goods decreases as price increases…
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Microeconomics:Leibenstiens analyses of sonb, bandwagon and Veblen effects are important because they demonstrate that the so-c
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Download file to see previous pages The 'law' of downward sloping demands From the diagram, as the price of commodities increases from P1 to P2, their demand decreases from Q1 to Q2. However, this is not the case as Leibenstien established in his analyses of snob, bandwagon and Veblen effects. From his analyses, Leibenstien established that not all goods obey the law of downward sloping demand. In his analysis, three effects disobey this law. These effects are the snob effect, the bandwagon effect and the Veblen effects. They behave abnormally and in contradiction with the law of demand. According to these effects, the demand of commodities increases with a corresponding price increase. The snob effect in economics is a phenomenon defining a situation whereby the demand for a particular commodity by people earning high incomes is inversely proportional to the demand for the same good to people earning low incomes in a society. The snob effect contradicts the law of downward sloping demand curve in the long run although in the short run it obeys the law of demand and reveals a downward slope (Leibenstein 1950, p. 200). The curve representing the snob effect has a positively sloping curve indicating that as the price of commodities increases, the demand for selected commodities increases. This results from the desire by individuals to own unusual, unique or expensive goods that defines their levels of income. Therefore, as these commodities become more expensive, their demand increases. The rich people know that the poor people cannot afford the very expensive commodities (Leibenstein 1950, p. 201). At the same time, as the income levels of the poor people increases, they can afford some of the expensive commodities. As such, the rich will tend to change their purchasing patterns, opting to purchase higher priced goods that the poor people cannot afford. The main characteristic of such commodities is that they have high economic value but have a low practical value. According to the snob effect, commodities that are hard to find and have high price tags have higher snob value. Therefore, the snob value increases with the increase in the price of a commodity. Examples of such commodities include the rare works of art and paintings, designer clothing and clothing. The importance of this effect in proving that the law of downward sloping effect is wrong is that the demand for commodities increases with the increase in the level of income of the people. Therefore, as people’s levels of incomes increase, so do their taste. They go for commodities that distinguish them from the low earning people in the society. The diagram shows a decrease in quantity of the commodity demanded with decrease in price. Bandwagon effect also portrays a downward slope in the short run though the long run effect contradicts the law of demand. The bandwagon effect is the tendency of beliefs spreading among the people with the probability of those who adopt it increasing with the proportion of those people who have already adopted them (Leibenstein, 1950, p. 195). Such trends occur in the fads and the fashion industry where as more people believe in something, others have to jump into the bandwagon regardless of the evidence available. Two factors lead to peoples’ tendency of following other people’ ...Download file to see next pagesRead More
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