In our Foundation of Integrative Thinking course, we were discussing the models we use and when they break down. The example discussed was the supply and demand model and how an increase in price will generally lead to less quantity demanded. In order to attempt to "break" the model, we discussed "luxury" goods, and how an increase in price seems to increase demand.
I think this is a naive and superficial analysis of the problem. I think the main problem is the definition of the problem. For instance, people will quickly acknowledge that there is a market segment that will pay the premium for the luxury component and will argue that because the price increases, there is more quantity demanded in this segment. But what I feel was ignored was the fact that the increase in price will increase the quantity demanded in ONE segment (the high end luxury segment) at the expense another (the moderate luxury segment). In this way, I don't believe that the model "breaks down" as quickly as some in my class would criticize.
In this way, if the price drops, a good can be percieved as inferior by the higher end luxury segment and quantity demanded in one segment will drop, but another will rise (disproportionately) meaning a larger overall increase in quantity demanded.
The point I'm trying to propose is that understanding a model (salience and causality) developed by others have implicit rigor and would require extensive study before being dismissed as 'broken'.
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2 comments:
Very true, but I think, the normal demand supply model breakes in these goods(rare and luxurious, snob goods), coz the rate at which demand had to increase (including both the ends) , it dint increase (excluded the upper end). Whatever the ratio of both the ends are, it excluded some part of demand. And this wud not have been the case in case of normal goods. Dats y we said the normal model breaks in this case.
Please do correct me if I'm missing something.
We actually had this question in our class based on the quiz we just wrote. Someone in our class was debating with our prof regarding normal versus luxury goods.
A luxury good is defined as a good that rises more than proportionally as income rises (so defined as income elasticity higher than 1 - or perhaps MUCH higher than 1). Whereas a normal good is any good with an income elasticity over 0.
Our econ prof said it best: all luxury goods are normal goods (because of the positive income elasticity).
Inferior goods are goods with negative income elasticity (less than zero).
Whenever I get confused, I always go back to the math :)
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