Chapter 3: Problem 21

The price of good \(X\) is higher in year 2 than in year 1 and people are buying more of good \(X\) in year 2 than year 1 . Obviously, the law of demand does not hold. Do you agree or disagree? Explain your answer.

Short Answer

Expert verified

The situation doesn't necessarily violate the law of demand, as there could be other factors at play causing people to buy more of good X even though its price increased. Without further information, we can't definitively agree or disagree with the statement.

Step by step solution

Defining the Law of Demand

First, the Law of Demand states that all other factors being equal, as the price of a product (good X in this instance) increases, quantity demanded falls; likewise, as the price of a product decreases, quantity demanded increases.

Reviewing the Scenerio

In this exercise, it's asked to agree or disagree with a situation where the price of good \(X\) increased from year 1 to year 2, and the demand for it also increased. At first glance, this seems to contradict the Law of Demand.

Accounting for Exceptions to the Law

One should remember that the Law of Demand holds 'all other factors being equal', which means ceteris paribus. However, in real-world scenarios, these other factors can and often do change. Some exceptions to the Law of Demand can include - Changes in taste and preferences, Rise in income (for a normal good), Expectation of a future price rise.

Considering the Given Situation

In the given scenario, we don't have any additional information. Therefore, it's possible that some external factor(s), not stated, could have contributed to the rise in demand despite the increase in price.

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