(a) Describe each of the following: (i) Abnormal demand (ii) Effective demand (b) Give three reasons for the occurrence of abnormal demand.

Answer Details

(a) Descriptions.

(i) Abnormal demand. This is a situation in which the quantity demanded of a good behaves contrary to the ordinary law of demand: quantity demanded rises as price rises, or falls as price falls. The demand curve therefore slopes upward from left to right instead of downward. It applies to exceptional goods such as Giffen goods and goods of ostentation (Veblen goods).

(ii) Effective demand. This is demand that is backed by the ability and willingness to pay. A mere desire for a good is not effective demand; the consumer must both want the good and have the purchasing power (money) to buy it at the ruling price.

(b) Three reasons for the occurrence of abnormal demand.

• Giffen goods: for very inferior staple goods consumed by the poor, a fall in price can lead people to buy less (and buy more of superior foods), while a price rise makes them buy more of the staple.
• Goods of ostentation (prestige/Veblen goods): luxury items such as designer goods or jewellery are bought more as their price rises, because a high price is taken as a sign of quality or status.
• Expectation of future price changes: if buyers expect prices to rise further, they buy more now even though price has already risen (speculative demand); if they expect a fall, they buy less even as price falls.
• Fear of scarcity: anticipated shortage makes consumers rush to buy more despite rising prices.

Examination reminder: abnormal demand is the exception that produces an upward-sloping demand curve; effective demand stresses ability plus willingness to pay, not mere desire.