Question

Sam owns a fresh vegetable stand. Last week he decided to raise his carrot prices from 59 d per bunch to \(69 \phi\) per bunch. Subsequently, Sam noticed that several of his regular customers were buying 2 bunches instead of their usual one. In fact, his carrot sales had gone up appreciably. When he finally asked one of his customers why she was buying so many carrots, she replied, "My neighbor told me that you had recently raised your price because carrots were in short supply, and that I ought to stock up before you ran out. Does this contradict the law of demand? Why or why not?

Short answer

The situation described does not contradict the law of demand, as the increase in demand and quantity demanded was caused by an external factor (perceived scarcity) rather than the normal relationship between price and quantity demanded. The law of demand holds true when everything else is held constant, which was not the case in this scenario.

Step-by-step solution

Identify the Change in Price

Sam increased the price of carrots from 59 d to 69 d per bunch. This is the price change that we need to focus on.

Analyze the Change in Quantity Demanded

From the information given, we can observe that the quantity demanded of carrots increased - customers started buying two bunches instead of one.

Consider Other Factors Affecting Demand

In this case, we have additional information about the customer's reason behind buying more carrots: the belief that carrots were in short supply and they needed to stock up before Sam's supply ran out. This is an example of an external factor that influenced the demand for carrots beyond their price change.

Analyze How the External Factor Affects the Law of Demand

In this scenario, the belief of a scarce supply fueled a sense of urgency among the customers, causing them to purchase more carrots despite the price increase. This external factor caused an increase in demand, which led to an increase in the quantity demanded even though the price had also increased.

Determine whether this Contradicts the Law of Demand

The law of demand holds true when everything else is held constant. In this case, the external factor of perceived scarcity caused an increase in demand, resulting in an increase in the quantity demanded despite the price increase. This does not necessarily contradict the law of demand, as the assumption of "all else being constant" does not hold. Based on these steps, we can conclude that the situation described does not categorically contradict the law of demand, as the increase in demand resulted from an external factor rather than the normal relationship between price and quantity demanded.

Key concepts

Price Elasticity

Price elasticity is a crucial concept in understanding consumer behavior. It measures how much the quantity demanded of a good responds to a change in price. Typically, when the price of a product increases, the quantity demanded tends to decrease; however, the extent of this change can vary. This is where elasticity comes into play.

Price elasticity can be classified as either elastic, inelastic, or unitary, depending on the change's scale:

• Elastic: A significant change in quantity demanded with a small change in price.
• Inelastic: A small change in quantity demanded despite a significant price change.
• Unitary: Proportional change in quantity demanded to the price change.

Understanding elasticity helps businesses make informed pricing decisions, especially in competitive markets.

External Factors in Demand

External factors significantly influence the demand for goods and services, often altering consumer behavior regardless of price changes. These factors can include consumer preferences, seasonal changes, or even current events.

In Sam's case, the belief that carrots were in short supply acted as an external factor, increasing customer demand. External factors can induce a sense of urgency or necessity, encouraging consumers to buy more to avoid missing out. Businesses and consumers alike should remain aware of these factors as they can impact market dynamics, prices, and availability.

Quantity Demanded

The concept of quantity demanded refers to the amount of a product that consumers are willing and able to purchase at a given price level during a specific period. It represents one point along the demand curve, and changes in quantity demanded are generally influenced by price variations.

In the provided scenario, while the price of carrots increased, the quantity demanded also rose due to the perceived scarcity. Usually, a price increase leads to a decrease in quantity demanded, showcasing the importance of examining underlying factors that might cause deviations from expected patterns.

Scarcity Effect

The scarcity effect dramatically influences consumer purchasing behavior by creating a perception of limited time or availability. This perception can lead consumers to purchase more than usual, driven by fear of missing out or concern over rising prices.

In Sam's vegetable stand scenario, the scarcity effect was triggered when customers believed carrots were in short supply. This thought process tends to override regular purchasing decisions, pushing consumers to act quickly before the product is potentially gone. Understanding the scarcity effect can help businesses predict consumer behavior in situations where products are marketed or perceived as limited.