Understanding Positive Elasticity of Demand
Positive elasticity of demand is a unique economic phenomenon where the quantity demanded of a good or service increases as its price rises. This directly contradicts the typical behavior observed in most goods, where demand decreases as prices increase. In this article, we will explore the concept of positive elasticity of demand, the scenarios in which it occurs, and the methods for calculating it.
What is Positive Elasticity of Demand?
Positive elasticity of demand refers to a situation where an increase in the price of a good or service leads to a corresponding increase in the quantity demanded. This phenomenon is less common and can be observed in specific goods and services, such as Giffen Goods and Veblen Goods. These goods defy the traditional law of demand, where higher prices generally result in lower demand.
Giffen Goods
These are goods that, when their price increases, the quantity demanded also increases. This occurs because the income effect outweighs the substitution effect. Giffen Goods are typically considered inferior goods, meaning they are more affordable and are chosen over more expensive alternatives when income decreases. As the price of these goods rises, consumers may feel financially pressured and substitute lower-quality items, increasing demand.
Veblen Goods
Veblen Goods are luxury items that become more desirable as their prices increase. Unlike Giffen Goods, which are inferior, Veblen Goods are usually considered superior goods. The higher the prices, the more status or prestige the item seems to confer. This can be observed in expensive designer clothing, high-end watches, or luxury cars. Due to their association with wealth and social status, consumers may be willing to pay more for these items, thus increasing their demand as prices rise.
Calculating Positive Elasticity of Demand
The elasticity of demand, including both positive and negative cases, can be measured using the price elasticity of demand formula:
E_d frac{text{Change in Quantity Demanded}}{text{Change in Price}}
In the case of positive elasticity, the calculated value of E_d would be greater than 0, indicating that the quantity demanded moves in the same direction as price changes. This is contrary to the typical negative elasticity, where E_d is less than 0.
Interpreting Price Elasticity of Demand
When examining price elasticity of demand, we are essentially looking at how a small change in price will affect the quantity demanded. Will the change result in a higher percent change to quantity demanded (Qd), a smaller percent change, or an equal change?
If the answer is greater than 1, it indicates elastic demand, meaning the quantity demanded is very responsive to price changes. If the answer is less than 1, it represents inelastic demand, meaning the quantity demanded is less responsive to price changes. When the answer is equal to 1, it is considered unit elasticity, suggesting that the quantity demanded changes proportionally with price.
Mathematical Sign of Price Elasticity
It is important to note that mathematically, the answer calculates to a negative value, as it follows the law of demand. However, in cases of positive elasticity, the negative sign is not typically emphasized as it is in typical demand scenarios. Google's answer states that price elasticity is usually negative, indicating the typical demand behavior. Positive price elasticity is more of an exception, and the concept can be challenging to grasp initially.
Conclusion
Positive elasticity of demand is a fascinating and somewhat counterintuitive aspect of economic behavior. While Giffen Goods and Veblen Goods represent the primary types of goods that exhibit this characteristic, understanding and calculating positive elasticity of demand can provide valuable insights into consumer behavior and market dynamics.