Answer to Question #45680 in Macroeconomics for Nilabh

Question

Year Demand (Lakh in tones) Price (1970-71 = 100)
1975 – 76 36.9 168.9
1976 – 77 37.5 173.1

The comment of a prominent politician on this data is as follows :
“This clearly shows that the law of demand is not operating in the Indian sugar MARKET. The price went up yet consumers bought more. We cannot rely on MARKET. The price went up yet consumers bought more. We cannot rely on outdated economic concepts from the previous century for an analysis of current problems.”
Do you agree with this observation? How would you interpret the above given data ?

Answer 1

If the demand for sugar rises after the rise of the price, the demand for sugar may behave like the demand for a Giffen good.
In economics and consumer theory, a Giffen good is a product that people consume more of as the price rises—violating the law of demand. Normally, as the price of goods rises, the substitution effect makes consumers purchase less of it, and more of substitute goods. In the Giffen goods situation, the income effect dominates, leading people to buy more of the goods, even as its price rises. Typically, the Giffen good is still the cheapest source of a necessary resource (e.g. calories), therefore displacing alternative sources from the fixed amount of income being spent on the resource.