Monday, November 5, 2007

Breaking the First Law

According to everyone's favorite Managerial Economics text, the First Law of Demand states that consumers demand (purchase) more as price falls, assuming other factors are held constant.

Despite its obvious importance in economics - it's the "first" law and we write it with all capital letters, so it must be pretty important - the First Law sometimes appears to break down. I was reminded of this when my wife went shopping for a new cell phone this weekend. She was comparing two Bluetooth headseats to accompany her phone. She had no basis for comparing the quality of the two headseats, but she was sure that the more expensive one had to be better. So, my wife's quantity demand for the higher-priced headseat rises as price increases. Curious.

Now your typical weasely economist is liable to say, "hey, we said 'assuming other factors are held constant' in the First Law." If price affects perception of quality, maybe other factors aren't held constant. With this kind of big qualification, maybe we should call it the "First Guideline." ;)

For examples of other instances of quantity demanded increasing with price increases, see Giffen goods and Veblen goods.

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