Can you identify the error in the following statement about demand curves?
The price of t-shirts keeps rising, but people keep buying more t-shirts. Therefore the demand curve must slope upwards.
Please explain the error in economic terms.
2 Answers | Add Yours
If I'm understanding your question correctly, you need to explain how people could buy more t-shirts as the price rises (and you can't say that the the demand curve is upward sloping).
On that assumption, here goes.
What's happening here is not that the demand curve is upward sloping but rather that something is working to increase demand (that is, to move the whole demand curve to the right). Some things that could do this:
T-shirts might be an inferior good and people are getting poorer. Therefore they demand more t-shirts than before and the demand curve moves.
The price of other clothing options goes up and so people turn to t-shirts. Demand goes up.
At any rate, just graph this for yourself. Draw a demand curve and a supply curve. Then draw a second demand curve to the right. You'll see that the equilibrium price and quantity both go up even though the demand curve is still downward sloping.
The error in the statement is implying that simultaneous rise in t-shirt prices and sale explains the downward sloping curve. Actually if we draw a curve that shows the price and demand of t-shirt or any other product for which both demand and price is rising, it will be an upward sloping curve rather than the the typical downward sloping demand curve.
It would be worth while to explain that the statement:
The price of t-shirts keeps rising, but people keep buying more t-shirts.
in the question is not necessarily incorrect. It is possible for both prices and sale of a product to rise. As a matter of fact in all developing economies are characterized by inflation accompanying the development. This means that increase in total business volume of most of the goods is accompanied by simultaneous rise in their prices. Also please not that this phenomenon does not go against the the lay of downward sloping demand curve. This law is based on the assumption that all other conditions other than the price and demand remain constant. But when we talk of rising prices we are really talking of changes in prices and demand over a period of time, during which many other changes are bound to occur.
We’ve answered 317,724 questions. We can answer yours, too.Ask a question