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Wednesday 10 July 2013

Law of demand

     Based on law of demand clearly state that all else being equal. This theory work in a opposite way. When price of product increase, quantity for demanded fall, when price of product fall, quantity for demanded will raise. Law of demand show that quantity demand and price are both inversely related. 

     Basically, the quantity demanded for good increase with a fallen price of good. However it might not be true in some other cases. These situation can be explained by Giffen goods discovered by Robert Griffen one of the respective economists back to year 1910.He define a Giffen good as inferior good as in whenever price raise,demand for the product raise too.

     As an example, during the Irish Potato Famine of the 19th century, potatoes were considered one of Giffen good's. Potatoes were the largest staple in the Irish diet, so as the price rose it had a large impact on income. People responded by cutting out on luxury goods such as meat and vegetables, and instead bought more potatoes. Therefore, as the price of potatoes increased, so did the demand. 



Source from: Mankiw, Gregory (2007). Principles of Economics. South-Western Cengage Learning. p. 470.

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