What is a perverse demand curve?

A perverse demand curve refers to a situation where the relationship between price and quantity demanded goes against the typical downward-sloping pattern. Instead of the usual positive relationship between price and quantity demanded (higher prices leading to lower quantity demanded), a perverse demand curve indicates an inverse relationship (higher prices leading to higher quantity demanded).

A perverse demand curve can occur in certain situations where the usual assumptions of consumer behaviour and market dynamics do not hold.

Here are a few examples:

1. Veblen Goods: Veblen goods are luxury goods that exhibit an upward-sloping demand curve due to their status or conspicuous consumption value. In this case, consumers may perceive higher prices as a sign of exclusivity or quality and may actually demand more of the good as its price increases. This contradicts the typical downward-sloping demand curve.
2. Giffen Goods: Giffen goods are inferior goods for which the income effect dominates the substitution effect. When the price of a Giffen good increases, low-income consumers, who spend a significant portion of their income on these goods, may be forced to allocate even more of their limited budget to these goods. As a result, the quantity demanded of the Giffen good increases with the price, leading to a perverse demand curve.
3. Network Effects: In certain cases, the demand for a good or service may increase as more people adopt or use it. This is known as a positive network effect. For example, with social media platforms or online marketplaces, the more users there are, the more valuable the platform becomes to each user. In such cases, as the price increases, more people may join or continue using the service, resulting in a perverse demand curve.

It's important to note that perverse demand curves are relatively rare and typically occur under specific circumstances. The majority of goods and services adhere to the conventional downward-sloping demand curve, where higher prices lead to lower quantities demanded due to the substitution effect and income effect.