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    The demand curve for hybrid automobiles is upward sloping. It is a violation of the law of demand. Why?

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    Solution Preview

    The law of demand stated that price and quantity demanded are negatively related. When price increases, quantity demanded will decrease and vice versa. There are two effects responsible for the relationship between prices and quantity demanded for goods and services. These two effects explain why demand curve is downward slopping.
    They are:

    • Substitution effect
    The change in consumption of one good as a result of a change in its price relative to the price of other goods in consumers' consumption basket of goods and services. Each consumer has a preference of quantity of goods and services to consume given his/her budget allocation. Therefore, when the price of one good decreases, he/she can afford to buy more of ...

    Solution Summary

    The law of demand stated that the demand curve is downward slopping. However, there are exceptions to the law for the Giffen/inferior goods and for Veblen/luxury or status-seeking goods.