Article Review : "Demand" By David.R Henderson
The most famous law in economics, and the one economists are most sure of, is the law of demand. On this law is built almost the whole edifice of economics. The law of demand states that when the price of a good rises, the amount demanded falls, and when the price falls, the amount demanded rises.
But the low prices it not always raise the demand. One of the best examples involves a new car wax, which, when it was introduced, faced strong resistance until its price was raised from $.69 to $1.69. The reason, according to economist Thomas Nagle, was that buyers could not judge the wax’s quality before purchasing it. Because the quality of this particular product was so important—a bad product could ruin a car’s finish—consumers “played it safe by avoiding cheap products that they believed were more likely to be inferior” (Nagle 1987, p. 67).
It is not just price that affects the quantity demanded. Income affects it too. As real income rises, people buy more of some goods (which economists call “normal goods”) and less of others (called “inferior goods”). Urban mass transit and railroad transportation are classic examples of inferior goods. That is why the usage of both of these modes of travel declined so dramatically as postwar incomes were rising and more people could afford automobiles. Environmental quality is a normal good, and that is a major reason why Americans have become more concerned about the environment in recent decades.
Another influence on demand is the price of substitutes. When the price of Toyota Camrys rises, all else being equal, the quantity of Camrys demanded falls and the demand for Nissan Maximas, a substitute, rises. Also important is the price of complements, or goods that are used together. When the price of gasoline rises, the demand for cars falls.
Source : http://www.econlib.org/library/Enc/Demand.html
But the low prices it not always raise the demand. One of the best examples involves a new car wax, which, when it was introduced, faced strong resistance until its price was raised from $.69 to $1.69. The reason, according to economist Thomas Nagle, was that buyers could not judge the wax’s quality before purchasing it. Because the quality of this particular product was so important—a bad product could ruin a car’s finish—consumers “played it safe by avoiding cheap products that they believed were more likely to be inferior” (Nagle 1987, p. 67).
It is not just price that affects the quantity demanded. Income affects it too. As real income rises, people buy more of some goods (which economists call “normal goods”) and less of others (called “inferior goods”). Urban mass transit and railroad transportation are classic examples of inferior goods. That is why the usage of both of these modes of travel declined so dramatically as postwar incomes were rising and more people could afford automobiles. Environmental quality is a normal good, and that is a major reason why Americans have become more concerned about the environment in recent decades.
Another influence on demand is the price of substitutes. When the price of Toyota Camrys rises, all else being equal, the quantity of Camrys demanded falls and the demand for Nissan Maximas, a substitute, rises. Also important is the price of complements, or goods that are used together. When the price of gasoline rises, the demand for cars falls.
Source : http://www.econlib.org/library/Enc/Demand.html
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