Question

The law of demand states that as the price of a good rises,
A. buyers purchase more of the good, because they expect prices to be even higher in the future
B. buyers purchase less of the good, because they expect prices to fall in the future
C. buyers purchase less of the good, because their real income decreases with an increase in price
D. buyers purchase more of the good, because the price of a substitute has risen

Pl explain in atkeast 150 words.

Answer 1

All the options which have been provided here (A,B,C,D) are Exceptions to the law of demand.

What are Exceptions to the Law of Demand?

In simple words Exceptions means The factors which hold the Law of Demand False.

In option A and option B-

There is Expectation of change in price in future. As when the buyer expects that Prices will increase in the future, his demand for that product increases even if the current prices of that product are high.

Similarly, when the buyer expects that prices will fall in future his demand for that good decreases. This violates the Law of demand. Here exceptional demand curve will work as shown in the figure (i)

In option C,

There is an Income Effect in which buyer's purchasing power changes because of the change in Real income. If Price increases more than income, real income will go down. If price decreases and income doesn't change, then real income goes up.

In option D,

There is a change in the price of substitute goods. When the price of a substitute good increases, the quantity demanded for that good decreases, but the demand for the good that it is being substituted for,

increases.

According to me, the correct answer will be option C, becauses according to the question, the price of goods has increased and if the price of goods increases more than income, real income will go down and consumers will not purchase goods and demand will decrease. As it is not mentioned in the question that whether price has increased more than income or less than income, i have assumed here that if price has increased more than income, real income of the consumer with respect to the purchasing power, will go down. And if purchasing power will be less, buyer will not consume good, and demand will decrease for the good.

And in this way, Law of Demand will hold true as it is stated in the question "The law of Demand states that......"