MR has had especially good comments lately:
The problem with this thought experiment is that even if every
individual (or all but one) have an upward-sloping individual demand
curve, the market demand curve will still be downward-sloping. The
reason is, when people who seek higher prices will run out of money
faster, thus buying fewer units. So higher prices still lead to fewer
units sold — i.e., a downward-sloping market demand curve.
Or how about this:
Your curve slopes upward until it reaches the point where quantity
times price equals your wealth. From there on, it slopes down (you buy
as much as you can afford, which is less and less at higher prices).So everyone would quickly spend all their money.
Oddly, some goods might end up with demand curves that slope down in
the relevant price range– in spite of the buyers’ preferences!
Perhaps you’ve already spoken your mind, but comments are open again, in case you would like to take another crack at the problem. And remember, spent funds are recycled to sellers and do not represent the destruction of real resources.
About MR comments:
If we agree that market demand curve is defined as the sum of quantities for each price level, I think there may be some problem to affirm that individual curves slope upwards and market demand curve does not.
I think the explanation/prediction on consumer behaviour depends on consumer theory assumptions (must be redefined: convexity, preference and utility function, equilibrium/a conditions rationality). Besides, predictions on market equilibrium need supply curve definition (firms theory conditions) and its comparison to new demand curve (comparison between slopes, elasticities).
TC’s chosen comments plus his comment about money being recycled and not destroyed leads to yet more problems. I disagree that aggregate demand will slope down, since the money spent will be cycled back into people’s pockets for spending (gee – this sounds like hyper-inflation. How does it differ? With hyper-inflation, you buy one unit for a higher price each day, so demand slopes upward *in time*) This universe has upward demand at any given time, leading to expenditure of all resources at any given time, allocated among goods according to equilibration of marginal utility, I guess. How is that different from today when (some) people spend their entire income on goods? I guess we have the case of a discount factor of zero (i.e., the future doesn’t matter) bbut now for everyone.
The more interesting question then is about the rate of cycling and distribution. Office workers are paid salaries. If they spend it all on payday, they get nothing the next day. They have to live on their purchases. Producers who are selling, however, are going to have income they can spend. Does that mean everyone will get into production, so they can charge as much as possible (which is what is demanded) and then spend that money? Everyone will be a capitalist and the proletariat will cease to exist 🙂
I have been reading about the New Russians (of the 90s) lately – they had upward sloping demand curves – if they could pay more, they would. Joke: “Yuri, I bought this tie for $80!” “Sasha – you got ripped off – I just got the EXACT same one for $150!!”
Well – there are some random thoughts….
Our demand curves slope downwards now? Right?
And we don’t go out and spend all money on the cheapest good, right?
So why would we all go out and spend all our money on the most expensive good if our curve sloped upwards.
We have a bundle of preferred goods and a limited budget? Right?
And even if our demand curve slopes upwards, we would still have a limited budget, and a bundle of preferred goods?
So if the peach guy raises peach prices, to the point where we would want to spend all of our income on peaches, we would probably not buy any peaches. We still need/want our car, computer games, clothes, etc.
Goods will still have relative prices, we will still have limited budgets, and we will still want more than one good, so if we spend some of our money on good x, we will have less money to spend on good y, and we still have to balance those cost/preference trade offs.
So yea, at the higher price of x we would want more TVs, but we would still want plenty of other stuff, and buying more TVs would mean we would have less money to buy that other stuff.
So, all our individual demand curves could slope upwards and the aggregate could slope downwards.
The peach guy could raise prices and we would end up buying less peaches, because as much as we like peaches, we like other goods as well, and we have limited budgets.
Right? Makes sense? Maybe?
But how would the relative prices of goods change if our individual curves sloped upwards.
What goods would cost more and what goods would cost less?
You would see fragmentation by wealth-determined market segments. The richest people would buy the entire supply of the most expensive goods until their wealth was exhausted. The next richest people would buy out the entire supply of the next set of goods, and so forth, down to poor people whose entire wealth + borrowing capacity would not be enough to buy even one item of the goods above their class.
The fact that money circulates suggests that eventually, the sellers of the most expensive goods would become the richest people, so that eventually we would get complete segmentation with the richest trading among themselves, the next richest group trading among themselves etc.
To get an equilibrium out of this, you would have to allow people to purchase contracts for recurring services and then continue to receive the services instead of paying more to purchase off-contract equivalents — i.e. allow people to buy condos with built-in, paid-for lifetime medical care and food.
This market of course exists in real life — private colleges, which usually add world-class gyms, travel opportunities, social networking, and education to the paid-for medical care and food. All we need to do to create the upward-sloping-curve world would be to get colleges to abandon financial aid, to admit based on price more than on admissions testing, and to increase the (existing) tendency for top colleges to hire the graduates of other top colleges.
Relatively inexpensive necessities without substitutes would cost more.
My knowledge on topology is really poor but I would like to ask about Barkley Rosser`s comments a question in order to better understanding.
I would like to have a theoretical definition for valid examples. My trial is the following: Consumer`s Utility Function is not the classical kind, that is to say, marginal utility does not decreases monotonically for each good or independent variable. I imagine wealth constraint changes, for instance, because of increasing one price, and then a new equilibrium at higher level of the quantity in stead of the classical lower one. This what you call tricky, isn`t it? I do not understand any other way to define an upwartd sloping demand curve.
Besides, regarding money and hyperinflation: I think it may be a mistake to consider those examples of upward sloping demand curves in hyperinflation context. In this circumstance money is loosing its condition as mean of exchange and higher nominal prices are not actually higher prices in terms of other goods necessarily. I remember living a hyperinflation myself (Argentina, 1989-1990) and buying more goods at higher nominal prices, but I do not remember people preferring higher opportunity costs for an aditional amount of any good, actually (excluding adicts and crazies)
Thanks
WMCW,
In standard neoclassical utility theory, increasing marginal utility can happen. It will manifest itself in a static model as non-convex indifference curves that bend outward. What this will lead to is discontinuous demand curves and behavior by an individual. Think addictive or obsessive/compulsive personalities. Increasing MU tends to push one to extremes: either I am only drinking or I am not drinking at all.
The question of inflation or hyperinflation is simply not an issue in this microecnomic discussion. What matters are real relative prices, not nominal ones. Of course in real world hyperinflations, what real prices are may become very unclear, especially as expectations are likely to be far from fulfilled.
Although…
Throughout all this I keep thinking that you could just call “absence of a good” a good, flip all the signs, make all prices be negative (pay someone to take goods off your hands) and be back in business… convexity and all.
WMCE,
Corner solutions are possible. OTOH, if the demand curve is discontinuous,
there may be no equilibrium (or multiple ones). The Brouwer fixed point
theorem (and its relatives) has continuity of the mapping as a sufficient
condition, and the demand curve is the basis of the mapping.
Is Demand Curve Always Downward Sloppy
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