Question

An analyst observes the following equilibrium pricequantity combinations in the market for restaurant meals in a city over a four-year period: $$\begin{array}{ccc} & & Q \\\\\text { Year } & P & \begin{array}{c}\text { (thousands of } \\\\\text { meals per month) }\end{array} \\\\\hline 1 & \$ 12 & 20 \\\2 & \$ 15 & 30 \\\3 & \$ 17 & 40 \\\4 & \$ 20 & 50\end{array}$$ He concludes that the market defies the law of demand. Is he correct? Why or why not?

Short answer

Based on the observed market data, the analyst could conclude that the law of demand is invalidated because the quantity demanded increases with the price. However, this conclusion does not take into account the influence of other factors that can affect the quantity demanded, such as changes in income, tastes and preferences of consumers, substitute prices, among others. Therefore, to get the full picture, these factors should be considered.

Step-by-step solution

Identify the data

From the exercise, we know that the price of restaurant meals and the quantity demanded over a four-year period is as follows: In year 1, price was $12 and quantity was 20. In year 2, price increased to $15 and the quantity simultaneously increased to 30. Similarly, in year 3, the price was $17 and the quantity was 40. Lastly, in year 4, the price was $20 and quantity was 50.

Apply the law of demand

According to the law of demand, if other factors remain constant, the quantity demanded should decrease when the price increases. However, from year 1 to year 2, the price of restaurant meals increased and the quantity demanded also increased, which also happened between all the other consecutive years. Therefore, it appears that the law of demand does not seem to be followed in this case.

Evaluate other factors

The law of demand assumes that all other factors influencing demand are held constant. Changes in these other factors can disturb the normal relationship between price and quantity demanded. Some of the factors that could have led to an increase in demand despite the increase in prices are the increase in population, the increase in income of the population, a change in consumer preferences or even a decrease in the prices of substitute products.