Question

Critically evaluate the following: In a business meeting, the CMO states that “demand curves don’t slope downward to the right. Why, out unit sales went up last year by 15% even though we increased prices by 5%. Clearly, demand theory is dead. We should increase prices again this year to increase unit sales." (Hint: Be sure to address whether the executive’s statement is unambiguously reliable.)

Answer 1

The executive's statement is not unambiguously reliable. The law of demand states that other things remaining constant, quantity demanded goes down when the price goes up and quantity demanded goes up when the price goes down. If other things like income, availability of substitutes, etc. changes, the law of demand will not hold good. For example, if the income of people goes up by 50% and the price goes up by 30%, there may still be an increase in the quantity demanded. Therefore, from the statement of the executive, we cannot unambiguously say that the law of demand is not applying here. It may be quite possible that income level went up or there is no substitute for the product anymore, etc.