Answer to Question #261971 in Microeconomics for Arsalan

Question

Over the years, the market demand for “long-playing records made of polyvinyl has fallen considerably as new technologies replaced the old “LP.” Yet, LPs are still available for sale and they sell at price points higher (in some cases much higher) than CDs. According to economic theory, when demand falls, the price of a product should fall. Explain this apparent contraction between theory and fact.

Answer 1

The law of demand states that other things held constant, when price increases demand decreases and when price decreases, demand increases. The inverse relationship is applicable only in case of normal goods, and not for Giffen goods. Giffen goods are those goods whose demand increases as price increases.

In this context, the Giffen paradox exists in the case of LPs, that is, there is a possibility that standard competitive demand, with nominal wealth held constant, can be upward sloping, thus violating the law of demand.