JNTU B.Tech III MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS Previous Question Paper (March - 2021 - R13/R15)

The Law of Demand states that, ceteris paribus, there is an inverse relationship between the price of a commodity and the quantity demanded. As the price increases, the quantity demanded decreases, and vice versa, represented by a downward-sloping demand curve.

Exceptions where an increase in price leads to an increase in demand include:

1. Giffen Goods: Inferior goods for which the negative income effect outweighs the substitution effect, causing consumers to buy more as price rises.
2. Veblen Goods (Conspicuous Consumption): Luxury items where high prices serve as a status symbol; higher prices increase the prestige and thus the demand.
3. Speculative Demand: If consumers expect prices to rise further in the future, they may increase current purchases despite a price hike.
4. Ignorance/Quality Perception: Consumers may incorrectly associate a higher price with superior quality, leading to increased demand.

Extension and contraction of demand refer to changes in quantity demanded due solely to changes in the price of the commodity, while other factors remain constant. This is represented by movement along the same demand curve.

Extension of Demand: Occurs when the price of the commodity falls, leading to an increase in quantity demanded. This is a downward movement along the demand curve.

Contraction of Demand: Occurs when the price of the commodity rises, leading to a decrease in quantity demanded. This is an upward movement along the demand curve.

Diagram description: Draw a downward-sloping demand curve on a graph with Price on the Y-axis and Quantity on the X-axis. A point moving down along the curve from a higher price to a lower price indicates extension. A point moving up along the curve from a lower price to a higher price indicates contraction.