Exceptions to the law of demand Watch

x2josh
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Hi, I was reading an article in this week's Economist (http://www.economist.com/news/briefi...bang-your-buck) about prostitution, and I have a few questions about how to apply this to the law of demand/supply, because I'm a bit nerdy.

It says that the prices of prostitution services are falling due to (among other reasons):
1) falling incomes due to the financial crisis
2) migration, increasing supply and the supply of prostitutes willing to accept lower rates
3) broader social change, which is reducing demand (casual sex is more available, thus available for free)

I understand that the law of demand describes the effect on the quantity demanded if the price of a good changes (inverse relationship). I also think I understand the concept of a Giffen good - the rise in prices of some goods without an easy substitute can actually increase the quantity demanded (??).

I think I understand reason 1): lower incomes reduces demand for most goods, including prostitutes.

Reason 2) makes intuitive sense, but I'm having trouble applying it to theory. More supply means that no one prostitute can charge a unreasonably high price because there are too many "similar goods" that consumers can choose from, i.e. its price elasticity is high?

3) doesn't make theoretical sense, though I understand the common sense behind it. Wouldn't a decrease in demand increase prices?

Thanks for helping me out with this unique application of basic microeconomics...!
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YNM96
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(Original post by x2josh)
Hi, I was reading an article in this week's Economist (http://www.economist.com/news/briefi...bang-your-buck) about prostitution, and I have a few questions about how to apply this to the law of demand/supply, because I'm a bit nerdy.

It says that the prices of prostitution services are falling due to (among other reasons):
1) falling incomes due to the financial crisis
2) migration, increasing supply and the supply of prostitutes willing to accept lower rates
3) broader social change, which is reducing demand (casual sex is more available, thus available for free)

I understand that the law of demand describes the effect on the quantity demanded if the price of a good changes (inverse relationship). I also think I understand the concept of a Giffen good - the rise in prices of some goods without an easy substitute can actually increase the quantity demanded (??).

I think I understand reason 1): lower incomes reduces demand for most goods, including prostitutes.

Reason 2) makes intuitive sense, but I'm having trouble applying it to theory. More supply means that no one prostitute can charge a unreasonably high price because there are too many "similar goods" that consumers can choose from, i.e. its price elasticity is high?

3) doesn't make theoretical sense, though I understand the common sense behind it. Wouldn't a decrease in demand increase prices?

Thanks for helping me out with this unique application of basic microeconomics...!
Prices are set by producers, in general, at a level which would enable them to maximise revenue whilst not harming demand, prices are basically set to meet demand, e.g. if prices of goods/services are too high demand falls (depending on the price elasticity of demand of the good/service), if they exceed the value that consumers place upon them consumers may no longer be willing to purchase the goods, if producers were to further increase prices demand is likely to continue falling, so no, a decrease in demand would generally lead to a fall in prices, as producers may attempt to increase sales by lowering the price of goods/services to make their products more competetive. Now, you have to ask yourself why people go to prostitutes, if it's simply for sex? In which case more casual sex would reduce demand for prostitutes which is likely to lead to a fall in their price. However, if people go to prostitutes for other reasons (prostitute fantasy perhaps) an increase in casual sex would not necessarily lead to a fall in the price of prostitutes,as demand would not necessarily be affected.
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username42
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(Original post by x2josh)
Hi, I was reading an article in this week's Economist (http://www.economist.com/news/briefi...bang-your-buck) about prostitution, and I have a few questions about how to apply this to the law of demand/supply, because I'm a bit nerdy.

It says that the prices of prostitution services are falling due to (among other reasons):
1) falling incomes due to the financial crisis
2) migration, increasing supply and the supply of prostitutes willing to accept lower rates
3) broader social change, which is reducing demand (casual sex is more available, thus available for free)

I understand that the law of demand describes the effect on the quantity demanded if the price of a good changes (inverse relationship). I also think I understand the concept of a Giffen good - the rise in prices of some goods without an easy substitute can actually increase the quantity demanded (??).

I think I understand reason 1): lower incomes reduces demand for most goods, including prostitutes.

Reason 2) makes intuitive sense, but I'm having trouble applying it to theory. More supply means that no one prostitute can charge a unreasonably high price because there are too many "similar goods" that consumers can choose from, i.e. its price elasticity is high?

3) doesn't make theoretical sense, though I understand the common sense behind it. Wouldn't a decrease in demand increase prices?

Thanks for helping me out with this unique application of basic microeconomics...!
RE: reason 3, I think you're mixing up demand and quantity demanded. Demand is a function - for any given price, the demand function tells you the quantity demanded. The law of demand says that lower prices have higher quantities. BUT a decrease in demand means that for ANY price, the quantity demanded goes down - the demand curve has shifted left. It does NOT mean that the quantity demanded goes down while the demand function stays the same, because economic theory says that the quantity demanded can only change if either the demand curve or the supply curve shift, and we're ignoring the effect of supply for point 3. On a supply and demand diagram a shift left in the demand curve means that the equilibrium price falls. This blog post is discussing a similar confusion. Basically, if you think of a supply and demand diagram, points 1 and 3 mean that the demand curve is shifting left, and point 2 means the supply curve is shifting right. Both of these factors will cause the equilibrium price to fall.
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