Answer to Question #187025 in Microeconomics for Suchita

Question

2.The price of food increased during the past year.

a.Explain why the law of demand applies to food just as it does to all other goods and services.

Answer 1

The law of demand says that there exists a negative relationship between the quantity demanded of the good and the price of the good such that an increase in the price of the good reduces the quantity demanded of the good and the decrease in the price of the good increases the quantity demanded of the good keeping constant all other factors which affect the demand of the good like income of the consumer, price of related goods.

The increase in the price of the food is going to make food expensive for the consumers and as a result, consumers are going to reduce the consumption of food and going to increase their consumption of different foods. Due to the increase in the price of the food, they may substitute home-cooked meals for food they are consuming before the price change and this is known as the substitution effect of the increase in the price of food and according to the substitution effect, the increase in the price of food is going to reduce the quantity demanded of food.When the price of food increases then the real income of the consumer falls and if food is considered as a normal good for the consumer then a decrease in real income of the consumer is going to reduce the quantity demanded of the food and this effect is known as the income effect of the increase in the price of food.

So when the price of food increases then the quantity demanded of food is going to decrease because in this situation income effect and substitution effect is working in the same direction and they both are saying that the consumer is going to reduce his quantity demanded of food due to the increase in the price of food. So we can say that the law of demand applies to food just as well as it applies to other goods and services.