Q.1. A newspaper 'Econotimes' published an article on the applicability of Law of Demand. It points out that the price of Economic analysis of Law' textbook is up 20% this year over last year, and yet sales are high this year. The author claims that these figures show that the Law of demand does not apply to the text books. What two mistakes has the author made in interpretreting the law of demand? Explain in detail. Analyse the fallacy in the following statement: "I dump my garbage and sewage into the lake, and it has not caused any problems. Therefore, we don't need any pollution regulations for this lake."
Answers
Answer:
The law of demand is one of the most fundamental concepts in economics. It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services that we observe in everyday transactions.
Explanation:
When the prices of petrol and diesel are cut, the demand for cars is expected to rise, because car and petrol are complementary goods. It implies that demand curve for cars will shift to the right. More cars are demanded at their existing price. The figure illustrates this situation. Initially, PK cars were purchased. As price of petrol and diesel decreases, PS cars are purchased even when price of cars is constant. Accordingly, the demand curve for cars shifts forward from D to D
1
.