Question

In Hunan province of China, when the price of rice was lowered through a subsidy, the demand for rice had decreased. However. when subsidy was removed, the demand for rice had increased because rice is the staple food in Hunan.

Has Law of Demand been followed in the above situation? Give a reason for your answer.

Answer 1

The Law of Demand says that, ceteris paribus, a fall in price raises quantity demanded and a rise in price reduces it. That ceteris-paribus condition was violated here: when the rice price fell because of a subsidy, consumers’ real incomes rose and they shifted toward relatively better foods (or other goods), so rice consumption fell; when the subsidy was removed and rice became more expensive, poorer households had to cut back on superior foods and consume more rice. This pattern is the classic Giffen‑good outcome (an inferior staple whose income effect outweighs the substitution effect), which is an acknowledged exception to the Law of Demand.