Question

"If the price of a commodity increases the quantity demanded can increase, decrease, or remain unchanged." While seemingly contradictory, each of these two statements is correct when placed in the proper context. Carefully demonstrate and explain the proper context for each of these statements.

Answer 1

Ans) Elasticity of a demand depends upon the necessity and availability of the substitutes.

In general, with increase in price of a commodity, the demand decreases due to availability of large number of substitutes and also because the demand can easily be adjusted i.e. the demand is elastic. Here the goods are normal goods. Eg÷ demand for clothes, cars, junk foods etc.

The other case is when the goods is a necessity and not sufficient substitutes are available, then demand do not change with increase in price i.e. demand is inelastic. Eg- salt, medicines.

Elasticity of demand generally carry a negative sign showing the inverse relationship between demand and price. But there is a special and rare case where the demand increases with increase in price i.e. the elasticity of demand is positive. These goods defy the law of demand and their demand curve is upward sloping. These goods are low income and non luxury goods. With increase in price their demand increases because people are now unable to buy other goods, will now consume more of this good.

For eg- there is a poor farmer, earlier he used to enjoy meat and potato where meat was a luxury and potato was a necessity for him. When the price of potato increased, poor farmer was unable to buy meat and therefore started consuming more potatoes. So, giffens good can be bread, flour and rice.