will the demand become more or less elastic at a new equilibrium point where both the...

will the demand become more or less elastic at a new equilibrium point where both the price and quantity of demand increased from the previous equilibrium?

*both the equilibrium price and quantity increased.

Solutions

Expert Solution

To answer this question we need to understand what kind good are we discussing here. We are given that both equilibrium price and quantity increases, which means price of good increases and demand also increases. This is contrary to the conventional theory of demand we all know it of, which says the when price of a good rises its demand falls.

The goods which shows such contradictory behaviour are called giffen goods. Giffen goods are defined as non-luxurious essential goods with very few close substitutes. The lack of close substitutes and its essentiality makes its demand inelastic or to put it differently the demand of giffen goods is less elastic.

So when the equilibrium of giffen good changes to a new equilibrium at both increased price and demand than previous equilibrium, its demand elasticity is going to be less elastic at that Ponit also due to reasons we discussed above. First the giffen goods are essential in nature and it has very few close substitutes.

Rahul Sunny answered 1 year ago

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