Everyone who studies introductory economics get introduced to the demand and supply curve graph. We may remember nothing about economics but this is definitely remembered. Demand and supply curves are the bedrock of economics and fundamentally underpin the modern capitalist system. Intuitively, these curves make sense; we have a downward sloping demand curve and an upward sloping supply curve. The point where these intersect is a equilibrium. This is the point at which the quantity demanded is exactly matched by quantity supplied. Therefore this is the point at which optimal allocation of scarce resources. These curves help to explain the dynamics of all sorts of products and services.
Makes sense right? Then how does one explain the demand for luxury products? Or for antiques? Or for paintings of the Old Masters? Or for aged wine? Or for financial products? In all these cases, demand increases as its price increases. Some of these cases can be explained through a modification of the demand/supply curves. In the case of the Old Masters and antiques and aged wine, supply cannot increase with demand. So the supply curve is a flat line instead of an upward sloping curve. Increasing scarcity will increase the value of the product. But what about luxury products? Their supply is not finite. It can and does increase as demand increases. Why then does demand increase as their prices go up? Most interesting is the case of financial products. In nearly all of them, increasing demand will result in vastly expanded supply and rapidly increasing prices. This is basically how stock market bubbles form. In both cases, traditional analyses of demand/supply curves will lead to wrong conclusions. A basic failure to understand this was to a certain degree responsible for the financial collapse that the world has been going through since 2008 - a collapse that has affected not just the financial system but the real economy which underpins all of Finance.
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