A The law of demand says that when the price of something go

A. The law of demand says that when the price of something goes down people buy less of it (and vice versa), all other things being equal. Such a change is referred to as an increase in quantity demanded and is shown by a movement down along a given demand curve. By contrast, an increase in demand is shown by a rightward shift in the entire demand curve 1. Some people seem to believe that there are goods for which the law of demand is irrelevant, goods that people just \"can\'t do without.\" Why do economists believe that the law of demand applies to all goods. (4) 2. Explain what would have to happen to each of the following in order for the demand for widgets to go up: a. Consumer incomes (2) b. Prices of other goods (2) 3. You hire a consultant to estimate the elasticity of demand for widgets, the product that your company produces and sells. When you receive the report, it indicates that the elasticity of demand for widgets is -0.6. Briefly explain what that means and how it would affect your firm\'s pricing decision? (4) B. For \"standard\" goods, the consumption of a good today has no effect on future consumption. But, the authors suggest that this is not true of all goods. 1. Briefly explain the distinction between a lagged-demand\" and a \"network\" good, giving examples of each. (4) 2. If the widgets are a \"network\" good, how would it affect your firm\'s pricing strategy. (4)

Solution

1) Economists believe that law of demand applies to all the goods is simply because there are very few exceptions to this rule. Almost all the goods including the necessities have demand function that slopes downwards. There are few goods however for which the demand curve may not slope downwards which indicates that the price reduction will actually reduce the quantity demanded. Veblen goods are one of its example where a luxurious item is purchase more than its price is higher. But more or less, almost all the goods and services follow the law of demand.
2) the demand for widgets will go up or the demand function for widgets will shift to the right when the consumer\'s income is increased. With higher income consumers will be able to purchase more of all the goods and considering that widgets are normal goods, their demand is expected to increase. Similarly the price of other goods must increase so that the demand for widgets can increase. When the price of other goods increases their quantity demanded will fall and consumers will switch to the market for widgets.
3) given that the elasticity of demand is less than 1, we can infer that the demand is inelastic and hence a higher price will increase the revenue. This is true because when a demand is inelastic, for a given percentage increase in the price, the percentage reduction in the consumption is a smaller and therefore total revenue is expected to increase. Hence the firm can increase the price if it is willing to increase revenue.