Question

The demand for a commodity generally goes down as the price goes up. Assume that the demand for a certain commodity (maybe gasoline) goes up as the price goes up. Is it still possible for there to be an equilibrium price? What would the demand & supply graph look like?

Answer 1

1. Yes. The demand for certain commodity goes up as the price goes up. Costly items which are bought for showing the prestige and status of the buyer. For example, Audi Car, Diamond jewellery, Gold jewellery. These commodities are purchased as they are priced high. If they become very cheaper it loses its value on the buyers. They won’t by them. As they are costly, they are demanded more because it shows their status and prestige to others.
2. In this case, the law of demand doesn’t work. Law of demand says, when price of a commodity comes down, the demand for the commodity increases. This law of demand is based on the law of diminishing marginal utility. When a buyer purchases some quantity of a commodity for his need, if the seller wants the buyer to purchase more, it is not possible unless the buyer reduces the price. Because, when a commodity is consumed more, its marginal utility comes down with consumption of each additional quantity. Then the buyer feels satisfied of his need and stops buying more. Now the seller has to attract the buyer to buy more. But the buyer doesn’t buy more. Because the need is satisfied. He purchase more quantity only at reduced price. He wish to equalize his utility and price.
3. Because if additional quantities are purchased, utility will come down. If price is remaining same, he cannot equal the reduced utility with the same price. He wants to equalize the reduced utility to reduced price. Only when price is reduced, he will purchase more. Because additional quantity will reduce his utility and he will buy if price is also reduced to that level.
4. But, in this case of exceptional goods like costly jewels, the price and demand has positive relationship. If price goes up, the demand also goes up. Because the utility also goes up with the price. If these commodities are priced high, it gives still high utility. Here law of diminishing marginal utility doesn’t work. So law of demand also doesn’t work.
5. Usually as per law of demand, the demand curve slopes downwards from left to right. In the above case, it is an exception to law of demand. It slopes upwards from left to right. The supply and demand curve will look like this

1. In the above example, the demand curve and supply curve is the same curve where increase in price increases the supply as usual and increase the demand also.
2. The equilibrium price is the price at which the market stands stable. In this price the quantity demanded is equal to quantity supplied. When there is excess supply, the seller keeps on reducing the price to an extent to which all the produced goods are sold. When there is excess demand over supply, the price goes up because who pays excess price can only get the commodity. Both these process stops at equilibrium price when there is no excess demand and no excess supply. At this price the quantity demanded by the consumers is equal to the quantity supplied. If there is any excess in supply, the price has to be reduced to make the consumers to buy more. If there is excess demand, buyers will compete among themselves and come forward to give higher price. It stops at equilibrium price where demand and supply is equal.

1. Hence the concept of equilibrium price says that the price is determined by the market forces demand and supply.
2. But in this exception to law of demand, the demand of the commodity and supply of the commodity both goes up when the price goes up. It’s value is considered more when its price goes up. Here the price of the commodity is not determined by the demand and supply of the product. The price is determined by the value the buyer feels psychologically when consuming the product.
3. There is no equilibrium price in these type of exceptional goods because the price is not determined by demand and supply.
4. When the price increases, supply also will increase and demand also will increase. It may not be equal extent but both demand and supply increase. The demand and supply curve may be the same curve or two independent parallel curve according to the elasticity of demand and supply as it is shown below.

1. If the price increases due to any reason, the supply in the market may increase or not but buyers will think increased price gives increased utility and they will buy more and more.(Example: Audi Car).
2. Conclusion: When there is exception to the law of demand for a certain commodity, the price is not determined by the forces of demand and supply. The price is not determined by the buyers who gives some high value because of the value felt by them psychologically is high irrelevant of its cost of production. Here in the price determination market forces doesn’t come to operation. It is the psychological or mind-felt value by the buyers of the commodity. The demand will go up if the price goes up because increased price equals its increased utility.