4 Answers | Add Yours
This set of circumstances does not contradict the law of demand. That is because there are many scenarios in which the observed price increases and increases in sales would be consistent with the law of demand.
The law of demand states that, all other things being equal, an increase in price will lead to a decrease in quantity demanded. The scenario given here may appear to contradict this, but it only appears this way if we forget that the law of demand says “all other things being equal.” There are many things that could have changed to allow people to buy more of this good even as the price has risen. Let us look at three possible scenarios.
One thing that might have happened is that the country got richer. If the economy is booming and people are getting more money, they are likely to buy more goods even if the goods become more expensive. Consumer income is one factor that can make demand rise.
Another thing that can make demand rise is consumer tastes. Sometimes, people simply come to think that a given good is “cool.” Maybe an advertising campaign has made them think this. Or maybe the good is “green” and people have come to think that conserving the environment is important. If more people start to think the good is cool, more of them will buy it even at a higher price.
Finally, demand for a given product can rise if its competitors’ prices rise (or if its competitors go out of business). In our scenario, it might be that more competitors went out of business each year, allowing the firm to raise prices without losing customers.
It is true that an increase in price should lead to a decrease in quantity demanded. But that is only true if demand remains constant. It is possible that demand could have risen for this product for one of the three reasons mentioned above, or for other reasons. If demand rises, it is possible for more of a product to be sold at a higher price.
Therefore, the law of demand is not necessarily violated by this scenario.
In response to michuraisin, I believe there isn't enough information to support the claim of whether demand has been 'violated' (which needs to be defined). I think the question is a bit ambiguous too - more information on context needs to be given. In the mean time, however, let's assume that there is a large demand for the product, and because of this popularity, prices are set higher for larger profits, and the amounts of goods are going up to attempt to meet the demand (which it may not be doing so - how popular is this product really?)
I concur that the question is a little ambiguous, but one thing you can't do is use assumptions in coming up with a solution. One has to use what is given.
The reasoning for my answer is simply based on what the law of demand is. In the words of "The Concise Encyclopedia of Economics:
"The law of demand states that when the price of a good rises, the amount demanded falls, and when the price falls, the amount demanded rises."
Even if not a lot of information is given, the scenario provided clearly and without a doubt does not follow the Law of Demand. In this sense, the law has been violated, as the exact opposite is happening.
Given your scenario, I do believe that the law of demand might be violated. What the law of demand states, assuming other variables are equal, is that the higher the price of the good, then the lower the demand for that good. Every year, the number of units being sold goes up, but so does the price, thus contradicting the law of demand.
There could be other factors that explain your situation. Perhaps the popularity of the unit has made it a hot commodity, so along with more units being made, the price goes up as well. However, with the information given, the law of demand is in fact violated.
No, I don't believe so. I interpret the law of supply v. demand as if there is a need for something, more of it will be purchased. Of course there are contributing factors, such as the quantities of the product on a global and national scale, which will affect price, but generally, if consumers need something, they will buy it on large scales and that means prices will go up.
This scenario shows that whatever the business is producing is becoming more popular over the years, and more consumers want it. The price of the product can therefore be manipulated (increased) because more profit can be made if done so.
We’ve answered 334,057 questions. We can answer yours, too.Ask a question