Tag Archives: economics

Veblen and Giffen Goods

There is a fundamental law of economics that says that as the price of a good or service increases, the demand for that product decreases. This is the Law of Demand: if prices are high, people cannot buy as much. But there are some products for which this is not the case.

Veblen Goods do not obey the Law of Demand: as their price increases, so does demand for them. This is a case of conspicuous consumption, people show off and demonstrate their status by buying increasingly expensive products. A £10000 gold Rolex watch does not really tell time any better than a £10 Casio, but owning a £10000 gold Rolex demonstrates that you are so wealthy that you can afford to spend £10000 on a watch. People do not want to buy a £10 Rolex, but they do want to buy a £10000 Rolex, to show off how much money they have.

There are some goods to which the Law of Demand does not apply, and which are not Veblen Goods. These are called Giffen Goods, and on the face of it, they seem to disobey all rational economic rules: demand for them increases even when their price increases, despite the fact that they cannot be used to demonstrate status via conspicuous consumption.

But imagine this situation: You need to feed your family. You normally buy a mixture of expensive (tasty) and inexpensive (staple) products to provide enough nutrition, but also some variety. But one day the price of rice quadruples: now you can’t afford the more expensive products and the rice, and you still need the staple rice to provide basic nutrition. Thus you buy more rice, even though its price has increased, and the rice is a Giffen Good.

You Should Buy Your Petrol in the Morning

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petrol-station

Petrol expands as it gets warmer, and it expands a lot: 950 parts per million per kelvin rise in temperature. This may not seem like a lot, but you might be surprised.

Energy is released when petrol is burnt because the energy required to break the bonds between the carbon and hydrogen atoms in the petrol is less than the energy released when new bonds are formed between the carbon and hydrogen and the oxygen atoms from the air. See, for example, the combustion of octane (one of the main components of petrol) shown below.

2\,\textrm{C}_{8}\textrm{H}_{18} + 25\,\textrm{O}_{2} \rightarrow 16\,\textrm{CO}_{2} + 18\,\textrm{H}_{2}\textrm{O} *

This means that the amount of energy released by burning petrol depends on the number of atoms in the petrol, and therefore on the petrol’s mass, but you pay for petrol by the litre. You use mass but pay for volume.

Imagine buying petrol on a day when there is a fifteen degree Celsius difference in temperature between morning and afternoon; the petrol will expand by 14250 parts per million. One litre of petrol bought in the morning will expand to 1.014 litres in the afternoon. This means that the same amount of energy will cost you 1.43% more if you buy it in the afternoon rather than in the morning.

underground-storage-tanks

This is all a bit of a moot point, as petrol is stored in large underground tanks, and the temperature underground is a lot more stable than the temperature above ground. Perhaps you’d be better stockpiling petrol in the winter when ground temperatures are lower.

* Breaking eighteen carbon-hydrogen bonds, seven carbon-carbon bonds and twenty-five oxygen-oxygen double bonds requires (18×413)+(7×348)+(25×498) = 22320 kJ. Forming thirty-two carbon-oxygen double bonds and thirty-six hydrogen-oxygen bonds releases (32×360)+(36×459) = 28044 kJ.

Gini Coefficient

The Gini coefficient (named after its inventor, statistician and sociologist Corrado Gini) measures the income distribution of a country’s population. It is often used as an analogue for measuring inequality within a population in general.

gini-map

A map coloured by Gini coefficient. Darker blues represent higher Gini coefficients (greater inequality).

A Gini coefficient of zero represents perfect income equality (everybody ears exactly the same amount) and a Gini coefficient of one represents perfect inequality (one person in the population earns all the money). Denmark has the lowest Gini coefficient (0.24) and the Seychelles the highest (0.66); the UK has a Gini coefficient of 0.34 and the US 0.45.

Consider three hypothetical ten-person countries:

Country Randomland Inequaliteria Equalistan
Citizen #1 49755 500000 50000
Citizen #2 61429 10 50000
Citizen #3 80411 10 50000
Citizen #4 45021 10 50000
Citizen #5 68466 10 50000
Citizen #6 96746 10 50000
Citizen #7 18788 10 50000
Citizen #8 71039 10 50000
Citizen #9 79777 10 50000
Citizen #10 10258 10 50000
Gini Coefficient  0.250 0.900  0.00

Another way of measuring income inequality is the Robin Hood index, which indicates the portion of a country’s total income that would need to be taken from the richest half of the population and given to the poorest half of the population in order to achieve income equality. For Randomland the Robin Hood index is 18.71%, for Inequaliteria it is 90% and for Equalistan it is 0%.