Reference no: EM133080414

Reply to this post agree or disagree

Generally, we observe that the demand curve is downward sloping and that the price is inversely related to demand. In this example, as the price rises from $20 to $25, the quantity demanded will become less than 4000 units according to the law of demand to this extent there are less sales. This phenomenon can be explained by a number of facts.

Substitution effect- as the price of a product Increases, the substitutes of this product become relatively cheaper. Consumers tend to prefer cheaper commodity over the costlier one. This will lead to shift in the consumption pattern towards its substitutes hence decreasing it's demand. Then, as the price increases quantity demanded falls.

Number of uses of the commodity- some of the products can be put to multiple uses. Amongst the uses, some are more important while others are less important. When the price of the product goes higher, the consumers will purchase such goods only for more important uses and will withdraw its usage from less important ones. The demand can also fall in such a way resulting from an increase in price.

Direct proof:

Electricity can be put to multiple uses such as cooking, lighting, heating etc. The most important is lighting. When the price of electricity is lower, say $20 consumers will tend to use it for less important purposes such as cooking and heating. However, as the price goes up say up to $25, it will be be used most on more important uses ultimately leading to a fall in demand. Same is the case with other goods.

However, it is also true that the demand curve may not always show the same behavior. Sometimes, it may change in the direction of the change in price. Nevertheless, these are exceptional cases and the law of demand holds good in most of the cases.