Question

Critically evaluate “In comparing the two equilibrium positions in Figure 3.7b, I note that a smaller amount is actually demanded at a lower price. This observation refutes the law of demand.”

Short answer

The backward shift in the demand curve (keeping the supply curve unchanged) can result in lower demand at lower prices. Since a shift in the demand curve is not caused by the price change, the law of demand (lower prices should increase the demand) cannot govern this situation.

Step-by-step solution

Explaining the law of demand

The law of demand says that if the price of ice cream increases from $2 to $4, the quantity demanded for ice cream should decrease. Consumers should consume and demand less at higher prices and vice versa. This is shown by movement along the same demand curve.

Evaluation of the statement 

A shift in the demand curve comes only with changes in the determinants of demand other than the price. For a given supply curve, changes in the demand shifters can cause the quantity demanded to increase along with an increase in price and decrease along with the decrease in the price.

As shown in the figure that is given in the question, a decrease in demand shifts the demand curve backward from$D_{3}to{D}_4$ , but the supply curve is unchanged. The new equilibrium is achieved by reducing the prices so that there will be a contraction of supply. The equilibrium price decreases to $P_4$at the same time the quantity demanded and supplied decreases to $Q_4$. Thus, a fall in demand and a fall in quantity supplied leads to a reduction in price.