Negative Elasticity of Money

Most people are aware of Price Elasticity of Demand, even if they don’t know the term. The logic is simple, if you raise the price of your product I won’t buy your product. This is however not the case with some special kinds of products. I will classify these products whose consumption increase in case of price hike into three categories.

Giffen goods: Common examples are food grains and similar essential commodities. When their prices increase it indicates severe shortage. However for the poorer class food is the most essential product and forms the bulk of their monthly expenditure. So, even if such goods are considered inferior in nature, they can’t be substituted and as long as other basic needs are being met, are purchased in even larger quantities as a security against a worse future. These are the kinds of goods which are most important to a certain class of people even if they maybe required by all classes of people.

Veblen goods: These are the goods where all the marketing efforts are directed. They are mostly “fashion” items and can range from pens and goggles to wines and cars. They keyword here is branding. While in the previous example it was the poorer section of the society which contributed to increased consumption, in this case it’s the upper middle class and richer people in the society who lead the increase in consumption. To the richer section these add to the snob-effect and are symbolic of status, while to the upper middle class these are aspirational goods. A higher price leads to exclusivity, while a price-cut would make the possession of these goods look less valuable. Its apt to try and compare the consumers of these goods to be among the achievers and experiencers in the VALS framework.

There is still a third category of goods which are neither inferior nor snobbish, and there might be ample scope for argument but the hike in consumption of these goods is mainly due to the middle class. Consider LPG as an example. In India LPG was not freely available for a long time for domestic purpose, with the increased availability the consumption levels have gone up in the middle class irrespective of price hikes year after year. The reason is not that LPG is price inelastic, rather the logic is, purchase it while you can. Its common knowledge that such a fuel source won’t last forever, but it’s more convenient and hygienic hence as long as it’s affordable, the consumption keeps increasing. Another example is bottled water, although considered price inelastic in many places, where unbottled water is potable to a considerable extent, a Kinley or Bisleri bottle at a lower price will increase suspicions about its purity and lower consumption. The two examples here, LPG and bottled water are somewhat opposed in the sense that LPG is kind of a Giffen good for the middle class (though its neither inferior nor short of alternatives), while bottled water is kind of a Veblen good for the middle class (without the snob effect). Since these do not fit exactly in either of the above two classifications, I have classified them differently.

Author: Guest

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