When the price of a good increases, it is incorrect to say that the Demand for t

Question

When the price of a good increases, it is incorrect to say that the Demand for that same good will decrease.

And when the price of a good decreases, it is incorrect to say that the Demand for that same will increase.

Please explain why this is the case.

The price of milk increased from $4.00 per gallon to $7.00 per gallon.

(a) Calculate the percent change in the price of milk. Show your work.

(b) Given that the Ed is equal to 0.80, calculate the percent change in the Qd of milk. Show your work.

(c) If the Qd of milk was 4,000 gallons when the price of milk was $4.00 per gallon, determine

the Qd of milk when the price is $7.00 per gallon. Show how you got your answer.

Explanation / Answer

(1) When price of a good changes, there is a change in quantity demanded, and not a change in demand. A change in demand takes place when any of the determinants of demand of a good excluding its own price changes. Therefore it is incorrect to say that "Demand has changed" when the good's own price changes.

(2)

(a) % Change in price of milk = [(New price / Old price) - 1] x 100 = [($7 / $4) - 1] x 100 = (1.75 - 1) x 100

= 0.75 x 100 = 75%

(b) Ed = % Change in quantity demanded / % Change in price

0.8 = % Change in quantity demanded / 75%

% Change in quantity demanded = 75% x 0.8 = 60%

(c) New Qd = Old Qd x (100% - % Change in quantity demanded)**

= 4,000 x (100 - 60)% = 4,000 x 40% = 1,600

**Following the law of demand, as price increases, quantity demanded of milk decreases

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