Question

Explain the term 'Veblen effect'. Give an example.

Answer 1

If consumers measure the desirability of a good entirely by its price and not by its use, then they buy more of a good at high price and less of a good at low price. Diamond, Jewellery and big cars, etc are such prestigious goods. In their case demand relates to such consumers who use them as status symbol. As their prices go up and become costlier, rich people think it is more prestigious to have them. So they purchase more. On the other hand, when their prices fall sharply, they are bought less, as they are no more prestigious goods. This is known as Veblen effect.