Question

1. Define the law of demand. Does the demand for water behave in accordance with the law of demand? Give two interpretations of a demand curve.

Answer 1

The law of demand states that there is an inverse relationship between quantity demanded and price for a normal good. As the price of a normal good increases, its demand falls and the fall in price of a normal good leads to increased demand.

Since water is a necessity, its demand does not behave in accordance with the law of demand most of the times. Any change in price of water will not influence the demand by a huge margin because it is a necessity and consumers will purchase it irrespective of the price.

The demand curve is downward sloping for normal goods indicating that as the price falls, the quantity demanded increases and vice versa. It shoes the quantity demanded at different prices.

The slope of the demand curve is the price elasticity of demand which measures the percentage change in the quantity demanded due to a percentage change in price.