This question tests understanding of the fundamental economic principle known as the Law of Demand. The Law of Demand describes the inverse relationship between the price of a good or service and the quantity consumers are willing and able to purchase, assuming all other factors remain constant (ceteris paribus).
Correct Option: D) It increases — When the price of a commodity falls, consumers are willing and able to purchase more of it, leading to an increase in the quantity demanded, assuming all other factors remain constant. This is the direct implication of the Law of Demand.
The question asks to identify the two variables whose relationship is described by the law of demand. To answer this, we need to recall the fundamental definition of the law of demand in economics.
C) Price of a commodity and the quantity demanded of that commodity
The law of demand establishes an inverse relationship between the price of a good and the quantity consumers are willing and able to purchase, assuming all other factors remain constant. When the price increases, the quantity demanded decreases, and when the price decreases, the quantity demanded increases.
The question asks for the fundamental condition under which the law of demand holds true. The law of demand states that, all else being equal, as the price of a good or service increases, consumer demand for that good or service will decrease, and vice versa. This "all else being equal" is a critical concept in economics known as ceteris paribus.
Correct Option: D) Other determinants of demand, such as income, tastes and prices of related goods, must remain constant (ceteris paribus)
This option correctly identifies the ceteris paribus assumption, which is fundamental to the validity of the law of demand. If these other factors change, the entire demand curve shifts, and the simple inverse relationship between price and quantity demanded (movement along the curve) cannot be observed in isolation.
The question asks for the principle that explains the downward-sloping nature of a typical demand curve. This requires understanding the fundamental economic reasons why consumers buy more of a good when its price falls and less when its price rises.
C) The law of diminishing marginal utility. This law directly explains why consumers are willing to buy more of a product only if its price falls. As they consume more units, the additional satisfaction (marginal utility) they get from each extra unit decreases. Consequently, they will only be willing to pay a lower price for these additional units, leading to a downward-sloping demand curve.
The question asks why Giffen goods are an exception to the law of demand. The law of demand states that, all else being equal, as the price of a good increases, the quantity demanded decreases, and vice versa. Giffen goods defy this law.
Correct Option: D) Their quantity demanded falls when their price falls, due to a strong negative income effect
This option accurately describes the behavior of Giffen goods. When the price of a Giffen good falls, the consumer's real income increases. Since Giffen goods are highly inferior, this increase in real income leads consumers to demand less of the Giffen good and more of superior alternatives. This strong negative income effect outweighs the substitution effect, causing the quantity demanded to fall even as the price falls, which is an exception to the law of demand.
The question asks why Veblen goods violate the law of demand. To answer this, we need to understand the definition of Veblen goods and the law of demand, then identify which option correctly describes how Veblen goods deviate from this law.
Correct Option: D) A higher price can make the good more desirable, raising rather than lowering its quantity demanded