Question

When the price of butter was "low," consumers spent $5 billion annually on its consumption. When the price doubled, consumer expenditures increased to $7 billion. Recently you read that this means that the demand curve for butter is upward sloping (i.e., price and quantity demanded are directly related, as price increases, quantity demanded also increases). Do you agree? Explain.

Answer 1

No we do not agree with the statement

When the price of butter was low the total expenditure was 5 billion dollar. However when the price doubled, total expenditure increased to 7 billion dollar. Total expenditure is a product of price and quantity. If total expenditure is increasing along with the price it implies that the percentage increase in the price is greater than the percentage decline in the quantity demanded. when this happens total expenditure increases despite a reduction in quantity demanded.

Take for example a case where total expenditure increases by 20%. It is possible that price has increased by 30% but quantity demanded has decreased by 10% so that the final increase in total expenditure is 30% - 10% which is 20%. in this case demand curve is downward sloping because price increase is resulting in decline in quantity demanded.