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Economic 'God Particle' Found

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A while ago I was involved in an exciting study of market pressures on prices for goods and services.

Given that the laws of supply and demand were in place, the study simply called for a search for any statistical aberrations to those laws: was there anyplace in the market where these laws did not seem to apply?

Just so we’re on the same page of the Business Directory: The law of supply and demand is a “Common Sense Principle which defines the generally observed relationship between demand, supply and prices: as demand increases the price goes up which attracts new suppliers who increase the supply bringing the price back to normal. However, in the marketing of high price (prestige) goods such as perfumes, jewelry, watches, cars, liquor, a low price may be associated with low quality, and may reduce demand.”

Okay, so economic theory is a study not very well defined, even by dictionaries, meaning ‘not very well understood’.

Take a moment to see if you can tell me what this means, especially the last sentence in relation to what the first bit says:

“Standard microeconomic assumptions,” say the dictionaries, “cannot be used to disprove the existence of upward-sloping demand curves. However, despite years of searching, no generally agreed upon example of a good that has an upward-sloping demand curve (also known as a “Giffen good”) has been found.”

“Some suggest that luxury cosmetics can be classified as a Giffen good. As the price of a high-end luxury cosmetic drops, consumers see it as a low quality good compared to its peers. The price drop may indicate lower quality ingredients, and you wouldn’t want to put those on your face.

 “One example of a Giffen good,” says the dictionary, “could be potatoes during the Irish famine.”

But potatoes in a famine are geared strictly to demand.

I’ve had experience with selling cosmetics and an absolutely inviolable part of any cosmetic marketing strategy is price, geared solely to perception no matter what kind of junk is inside – the higher the price, the more the demand.

(Unless it is junk, in which case, you are dead.)

Okay, I fooled you. The Giffen good is a little like the God Particle they’re looking for at the CERN particle accelerator – theory says it should exist, but no one’s found one.

But something is wrong somewhere, there is a skew in some of the basic economic definitions we are asked to accept.

It may just be the flimflam of ignorance: what do we really know about money markets and pricing policies? Just take a look at Wall Street’s little ‘negative’ global spin-off effect today.

Other than Roubini, I did find an economist on my side, one Graeme Pietersz and he deserves a say here:

 “A Giffen good is an extreme type of inferior good. The negative income effect of changes in price of a Giffen good is actually stronger than the substitution effect.

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Tom is a contributor to public debate on issues affecting our survival; works with a London and a South African think tank, is a working journalist and author.

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