Nominal Price Additional Cost Original Relative Price of New Relative Price of Andys concert =$380 Leons concert =$200 $ 100 Andys concert = 380 200 =1.9 Leons concert Andys concert = 480 300 =1.6 Leons concert Price of concert tickets have raised by $100
Although Andys concert ticket is more expensive than Leons, I would like to go to Andys concert
Despite the higher price, the man prefer Andys Concert, why? Does this refute Law of Demand?
No, this does not refute law of demand, as the price refers to relative price………..
According to Law of Demand, when price increases, quantity demanded will decrease. However according to Alchians Generalization of the law of demand, when there is an addition of fixed cost to the original nominal price, the relative price of the high quality good will be lowered. As a result, relatively more high quality concert is chosen by the man
I hope you will now have a better understanding of Alchians generalization of the law of demand