 Hi, Gerald Friedman, Department of Economics, University of Massachusetts. We're going to talk about demand, individual demand and the demand for products by the entire community. Now you may remember the standard model, neoclassical model of demand is based on diminishing marginal utility because of satiation. I have one chocolate, that's wonderful, I love it. Second chocolate, good, third chocolate, okay, fourth chocolate, I'm getting tired of it. Fifth chocolate, don't want it at all. The first chocolate I'd pay a lot for, second chocolate, I'd buy if you reduce the price. Third chocolate, yeah, cut the price a lot, I'll buy it. Fourth chocolate, make it cheap, I'll buy it. Fifth chocolate, if it's free, I'll take five, yeah. That's the standard demand by an individual. It's the way Robinson Crusoe would do things. He would make one canoe even if it's hard work. If the work's easier, he'd make two canoes. If it gets easy enough, he might make three, downward sloping demand by an individual living all by themselves. Following this approach, what do you do when prices go up? You get less. If you start out with low prices for chocolate, I'll buy four. Raise the price, I'll get only three. Raise prices some more, only two. That's the orthodox theory of demand. The real world, though, it often doesn't work that way. Indeed, sometimes you'll even observe this in your daily life. You walk, you look at ads and you say, oh, somebody's selling a laptop for $10. Are you going to buy it? Who would pay $10 for a laptop? What sort of laptop could you get for $10? You go and you see somebody selling dresses on the street for $5. You're going to buy a dress for $5? You're a guy. Why are you going to buy a dress? Guys don't buy dresses, even at $5. If it's a woman, if you're a woman, will you buy a dress for $5? Or will you assume that the seams are going to rip as soon as you put it on? Or it must be an antiquated style. There are all sorts of situations where you don't buy more at lower prices, and in fact you may buy more if prices go up. That's social life. The orthodox, neoclassical approach to demand that leads to this downward sloping demand curve is based on individuals, not just any sort of individuals, sociopathic individuals, individuals who don't care about anybody else, individuals who don't think about what other people are doing, individuals who are so sure of themselves that they don't need to think about, to take information from the outside world, from the social life of other people. No, that's not the normal person. Most of us are not turtles walking around in our shells. Most of us are looking around all the time to see what are other people buying? What are other people doing? What information can I get from that? How can I fit in? And in real life, we often end up acting contrary to the orthodox theory of downward sloping demand. The social sources of consumption that lead to upward sloping demand curves. I could break them up into four types. First, status, which we call the Veblen effect. Second, bonding, which leads to stampede. Third, information, which leads to price signals. And finally, network effects, which leads to Microsoft. Okay, Veblen effects are named after Thoresteen Veblen, who was late 19th, early 20th century American economist, one of the more interesting people around. Notable for two things. First of all, he had a voracious sexual appetite, which led him to lose several jobs because he not only had an appetite, but apparently he was very attractive. And at least twice, he was caught sleeping with the wife of university presidents. He lost those jobs. Not really fair. I mean, they could get divorced, but it shouldn't lose its job for that, I don't know. Second, he's famous for some of his writings, including most notably his 1899 book, The Theory of the Leisure Class, in which he coined the phrase conspicuous consumption. Why do you like having a fancy car? Yeah, you like having it because it goes fast, it jumps off when the light turns green, it has a good stereo system, yeah. And you like having it because it impresses your damn neighbor, who's always so arrogant and carrying on like he's so great. Well, I'm going to drive up in Alexis, I'll teach him. Why do you buy? Why do women wear high heels? I mean, they're not comfortable. You know, American women, adult American women have an epidemic of feet troubles coming from high heels, coming from pointy shoes, which goes back to middle ages when men wore pointy shoes and the French government banned pointy shoes in the 14th century because they were ruining the feet of Parisian bourgeois men. We buy things to signal to others that we are successful. We are good. Do you remember Kira Knightley in Pirates of the Caribbean and her corset? She almost died wearing that corset. Why did 18th century women wear corsets to impress others? It showed that they were rich and successful because they didn't need to breathe just like driving Alexis shows you rich and successful. I say rather than drive Lexuses, rather than wear corsets and high heels and fancy gowns that aren't comfortable and women trip over them and all that stuff, burn money. You want to impress people? Burn a hundred dollar bill in front of them. That'll impress them. You don't need to get status by spending money. You can get status by burning money. Okay, second, sometimes we follow the crowd because we think they know better. You want to buy an airplane? What type of airplane? I don't know. Look and see what other people are doing. You see people spending ten bucks on an airplane? Are you going to buy that airplane? No, you're going to buy an airplane that people spend a hundred million dollars on. That's a plane you trust. You want to buy something cheap? What are you, cheap? If you're really good at computers, maybe you'll buy the ten dollar laptop because you know you can fix it. But if not, you're going to buy a seven hundred dollar laptop from Dell or a thousand dollar laptop from Apple because at that price, you trust the quality. We even believe that more expensive stuff is better. They've done brain images of people drinking wine. They told them the wine was cheap. The brain images showed people thought wine wasn't very good. Tell them the wine's expensive? Same wine, brain images. People are enjoying the wine more because they're told it's more expensive. The expectation is if something's expensive, it's better. Third, you buy stuff to be part of a network of people who like the same things because you want to fit in. Why don't guys wear dresses? What happens in high school if a guy gets on a bus wearing a dress? Is he going to get off the bus without a black eye? No, somebody's going to beat him up. Guys aren't supposed to be like that. Women aren't supposed to have short hair. Guys aren't supposed to have long hair. You fit in. Raise the price of haircuts. Are women going to stop? Are going to the hair salon? Raise the price of haircuts. Are men going to grow their hair long? They'll keep doing what they do because they want to fit in. If more men want short hair and hair cut prices go up, are other guys going to stop cutting their hair? No, they're going to cut their hair more because they want to fit in. Higher prices, more demand, higher prices, still more demand because people want to fit in. Networks work the same way. You want what other people want. Are you going to buy a metric ruler or metric tools just because they're cheap? No, you buy imperial measures and imperial tools because they fit American stuff. Are you going in Europe? Are you going to buy imperial system measurements? A Fahrenheit thermometer just because it's cheap? No, you buy what fits in. How else do you explain the triumph of Microsoft? Why else would anybody use Microsoft stuff? Except it's what everybody else uses and it's easier to communicate. Even people with apples use Microsoft Office increasingly so that they can fit in with other people with people using Microsoft. You put it all together and yes, you have diminishing marginal utility for yourself. The first time's great, the second time's good, the third time you have a headache. But as a community, we have an upward sloping demand curve for many of the products that we consume. And on that counter-intuitive note, thank you and have a good day.