Which one of the following is not an assumption in the law of demand?
- A.There are no changes in the taste and preferences of consumers.
- B.Income of consumers remains constant.
- C.Consumers are affected by demonstration effect.
- D.There are no changes in the price of substitute goods.
Correct answer
Explanation
The correct answer is C, Consumers are affected by demonstration effect. The law of demand assumes buyers are not swayed by imitating others; the demonstration effect is in fact one of its exceptions.
The law of demand says that, other things remaining the same, the quantity demanded of a good falls when its price rises and rises when its price falls. 'Other things' are the assumptions: tastes and preferences do not change, consumers' income stays constant, prices of substitutes and complements stay the same, and no change in price is expected. The demonstration effect, a term linked with the economist James Duesenberry, describes people copying the spending of those around them. Such buying, like Veblen goods bought for show, can raise demand even as the price rises.
A is wrong to choose because unchanged tastes are a standard assumption of the law. B is wrong to choose because constant income is assumed too. D is wrong to choose because the prices of substitute goods are also held constant.
Exam tip: Law of demand holds 'other things being equal'; demonstration effect, Veblen goods and Giffen goods are its exceptions.
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