Question

1) Do you see any contradiction between these two statements? Using demand and supply theory of price determination, please explain.

a)  After the financial crisis of 2007-08, the price of houses was falling. As the economy is growing in recent years, many people are buying houses, which is leading to increase in price
of houses.
b) As the price of houses is increasing people are buying fewer houses.

2) Which of the two statements does represent the law of demand.

Answer 1

The law of demand states that if price of goods increases, quantity demanded decreases and vice versa.

Statement 1

As we see in first statement, ' many people are buying houses ' means increases in demand of houses but the price of the houses is increasing. According to the law of demand, the price of houses will decrease as the demand of the houses increases. This statement contradict the law.

Statement 2

'As the price of the houses is increasing people are buying less houses' this means as the price increases, demand of the house automatically decreases. This follow the law of demand.

Answer 2

Statement 2 represents the law of demand