Comment by dghf | Hacker News Reader

Comment by dghf | Hacker News Reader

> 12. Demand Curves Slope Down: The harder something is to do, the fewer people will do it. For example, raise the price of a product and fewer people will buy it. Lower the price and more people will buy it. Economics 101.

Not always as true as you might think. There are Veblen goods [0], luxury status symbols for which the high price is part of the attraction.

More controversially, there may be Giffen goods [1]. Imagine a poor part of the world, where an average family spends half of its food budget on some cheap staple -- bread or rice or whatever -- and half on meat and fresh fruit and vegetables, but the staple part of the diet provides three-quarters of their calories. If the price of the staple rises , then their food budget will no longer provide enough calories. The only way they can make up the deficit is by buying less meat/fruit/veg and more of the staple: in other words, as the price of the staple rises, so demand for it goes up.

[0] https://en.wikipedia.org/wiki/Veblen_good [1] https://en.wikipedia.org/wiki/Giffen_good

My favorite part of the paper that used field experiments to demonstrate that rice in Hunan is a Giffen good for the poorest consumers [0] is the cheeky inclusion of this quote from George Stigler:

> Perhaps as persuasive a proof [of the “Law of Demand”] as is readily summarized is this: if an economist were to demonstrate its failure in a particular market at a particular time, he would be assured of immortality, professionally speaking, and rapid promotion while still alive. Since most economists would not dislike either reward, we may assume that the total absence of exceptions is not from lack of trying to find them.

[0] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2964162/

What's the controversy over whether these types of good exist?

Is it over whether the family would truly choose to buy more staple food and less luxury food based solely on cost and not some other figure of merit such as nutrition? For example, I could see a situation where a family might still choose to purchase luxuries in the event the staples went up in price in order to maintain the wider variety of nutrients they would get from the varied diet than what they would get from eating just the staple.

Obviously there is some limit to this, where the need for simple calories outweighs the need for a wide variety of nutrients, at least over short periods.

I believe the controversy is whether an example of this happening in real life has been found. Several possible instances have been pointed at -- e.g. during the Great Famine in Ireland -- but none has yet been fully accepted.

>as the price of the staple rises, so demand for it goes up.

in $ terms, sure, but only because the price went up. In absolute units? No.

In absolute units it goes up.

Simplest model: peasants get 90% of their calories from cheap grain, and the balance from expensive meat. The price of grain goes up, so now they can't afford meat and have to eat more grain to meet their caloric needs.

yup I see it now. Thanks for the explanation.

Yes, in absolute units (according to the theory).

If you buy exactly the same amount of kg of staple as before, you won't have enough money to buy the same amount of other food stuffs as before, so you'll be short of calories. Assuming you can't spend more money on food, your only options are to go without or to buy more of the staple (and even less of the other foodstuffs).

Some made-up figures:

* Staple costs $1/kg, and provides 1500 calories/kg

* Other stuff costs $2/kg and provides 1000 calories/kg

Out of every dollar in your food budget, you spend:

* $0.50 on 0.5kg of staple for 750 calories

* $0.50 on 0.25kg of other stuff for 250 calories

for a total of 1000 calories for every dollar spent on food.

Then the price of staple goes up to, say, $1.20/kg.

If you stick to buying the same absolute amount of staple as before, your spending looks like this:

* $0.60 on 0.5kg of staple for 750 calories

* $0.40 on 0.2kg of other stuff for 200 calories.

You're 50 calories short.

You can get back up to 1000 calories per dollar by spending like this:

* $0.67 on ~0.56kg of staple for 833 calories

* $0.33 on ~0.17kg of other stuff for 167 calories

That's an absolute increase in staple consumption from 0.5kg to 0.56kg for every dollar spent on food -- a bit more than an 11% rise.

you're right. thanks for the informative explanation.

Reply on news.ycombinator.com