Economic Module 2 Critical Thinking Examples

. The law of demand holds truth because consumers only increase the quantity of goods they consume when price levels go down. However, the law of demand does not hold in two scenarios. The demand for luxury or Veblen goods increases as the prices increase. Inferior goods, which fall under the category of giffen goods, do not adhere to the law of demand. As prices of inferior good increase, consumers can not afford other superior goods, so they continue purchasing the inferior good. Luxury and inferior goods have inelastic demand because demand does not change even as prices increase. Normal goods have elastic demand where a unit changes in price levels lead to a unit change in demand for the good in the opposite direction.
2. Prices are established by producers. However, the response of the consumers towards the set price will lead to an equilibrium market price.
3. Demand derives supply in whereby the demand for a product determines the amount of the product the supplier will supply. The higher the demand, the more the supplier will bring to the market.
4. The government can regulate pricing when the prices of necessity goods are too high due to inflation. Therefore, price ceilings are introduced to shield consumers from paying very high prices.
5. Relatively inelastic goods are inferior giffen goods. Consumers of inferior goods are mainly the poor. They cannot afford superior goods. Therefore, as prices increase, they continue to purchase the inferior good because it is their only option. Staple foods are examples of inferior goods. Luxury goods also have an inelastic demand, for instance, jewelry.
6. People buy brand name products because they believe they are of high quality and durable. These products can be substituted only if the substitute product serves the same purpose and produces similar results. Generis substitutes can be purchased in place of brand name products to cut down on expenditure.
7. Price controls should be introduced in consumption goods markets to protect poor consumers from the high food and fuel costs. These are necessity goods whose prices have increased significantly in the recent past. With price controls, producers will be given subsidies in their expenditure on manufacturing or processing these goods in order to sell them at low prices.

Krugman, P., & Wells, R. (2010). Microeconomics (second edition ed.). London: Macmillan Higher Education.