Demand & Supply — Set 1

Correct Answer: C. Decreases

• **Decreases** = The Law of Demand states that, all else equal, as the price of a good increases, the quantity demanded falls. • **Inverse price-quantity relationship** — This holds because higher prices reduce consumer purchasing power (income effect) and make substitutes more attractive (substitution effect). • 💡 Wrong-option analysis: Remains constant: quantity demanded does not stay constant when price rises; only perfectly inelastic goods show zero response; Increases: an increase in quantity demanded when price rises would violate the Law of Demand (except for Giffen goods); Becomes zero: demand rarely drops to zero on a price increase; people reduce quantity but usually do not stop buying entirely.

Correct Answer: D. Downward sloping

• **Downward sloping** = A typical demand curve slopes downward from left to right, confirming the inverse relationship between price and quantity demanded. • **Negative slope on Price-Quantity graph** — Moving from top-left to bottom-right, higher prices correspond to lower quantities and vice versa. • 💡 Wrong-option analysis: Horizontal: a horizontal demand curve indicates perfectly elastic demand (Ed = infinity), not a normal demand curve; Vertical: a vertical demand curve indicates perfectly inelastic demand (Ed = 0); Upward sloping: an upward-sloping demand curve is the shape of a supply curve, not a standard demand curve.

Correct Answer: D. Rises

• **Rises** = The Law of Supply states that, all else equal, producers offer more of a product for sale when its market price rises. • **Direct price-quantity supplied relationship** — Higher prices make production more profitable, incentivising producers to expand output. • 💡 Wrong-option analysis: Is regulated: regulation constrains supply to a fixed quota; it does not reflect market-driven supply behaviour under the Law of Supply; Stabilizes: a stable price gives no new incentive to increase or decrease production; Falls: when price falls, the Law of Supply says producers offer less, not more.

Correct Answer: D. Equilibrium

• **Equilibrium** = Market equilibrium occurs when the quantity demanded by buyers exactly equals the quantity supplied by sellers at a specific price. • **No pressure for price change at equilibrium** — At this price, the market clears; there are no unsatisfied buyers or sellers pushing price up or down. • 💡 Wrong-option analysis: Inflation: inflation is a sustained rise in the general price level, not a condition of market balance between demand and supply; Deficit: deficit refers to expenditure exceeding revenue in government finance, not a supply-demand equality; Surplus: surplus occurs when supply exceeds demand, which is the opposite of equilibrium.

Correct Answer: A. Complementary goods

• **Complementary goods** = Complementary goods are used jointly in consumption; a rise in the price of one reduces demand for both it and its complement. • **Negative cross-price elasticity** — Cars and petrol, pens and ink, and coffee and sugar cups are classic pairs with negative cross elasticity. • 💡 Wrong-option analysis: Veblen goods: Veblen goods are luxury status items whose demand rises with price; they are not defined by joint consumption; Substitute goods: substitute goods can replace each other; their cross elasticity is positive, the opposite of complements; Giffen goods: Giffen goods are extreme inferior goods that violate the Law of Demand; they are not defined by joint use.

Correct Answer: D. Substitute goods

• **Substitute goods** = Substitute goods satisfy the same want and can be used in place of each other, exhibiting positive cross-price elasticity. • **Positive cross-price elasticity** — When the price of tea rises, demand for coffee (its substitute) increases as consumers switch. • 💡 Wrong-option analysis: Complementary goods: complements are used together; if tea price rises, demand for a complement would fall, not rise; Luxury goods: luxury goods are defined by high income elasticity, not by the ability to replace each other; Inferior goods: inferior goods are defined by negative income elasticity; the tea-coffee substitution is a price-based relationship.

Correct Answer: A. An increase in demand

• **An increase in demand** = A rightward shift of the demand curve means more is demanded at every price level; this is an increase in demand. • **Non-price factors cause shifts** — Income increases, positive taste changes, or a rise in substitute prices shift the curve rightward. • 💡 Wrong-option analysis: A decrease in supply: a decrease in supply shifts the supply curve leftward; it does not shift the demand curve; No change in demand: a rightward shift is by definition a change in demand; A decrease in demand: a decrease causes a leftward shift, not a rightward one.

Correct Answer: D. Normal good

• **Normal good** = A normal good has a positive income elasticity of demand; as consumer income rises, demand for the good increases. • **Positive income elasticity** — Most consumer goods (electronics, clothing, restaurant meals) are normal goods. • 💡 Wrong-option analysis: Necessity: necessities are broadly consumed but may have a low income elasticity; the category is not exclusively defined by rising demand with income; Giffen good: Giffen goods are inferior goods where rising prices lead to rising demand; income elasticity is negative; Inferior good: inferior goods have negative income elasticity; demand falls as income rises, the opposite of a normal good.

Correct Answer: D. Change in price of inputs

• **Change in price of inputs** = Input costs (raw materials, labour, energy) directly affect production profitability and thus the position of the supply curve. • **Input price change shifts the supply curve** — A rise in input prices increases production cost, shifting the supply curve leftward (decrease in supply). • 💡 Wrong-option analysis: Change in consumer income: consumer income affects demand, not supply; it shifts the demand curve, not the supply curve; Change in consumer taste: consumer taste shifts the demand curve; it has no direct effect on the supply curve; Change in population: population changes affect market demand; they do not cause the supply curve to shift.

Correct Answer: D. A surplus occurs

• **A surplus occurs** = When the market price is above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus (excess supply). • **Surplus = excess stock** — Sellers accumulate unsold inventory and are forced to lower prices to clear the market back to equilibrium. • 💡 Wrong-option analysis: Demand increases: demand does not automatically increase just because price is high; Demand is determined by non-price factors; Supply decreases: supply does not automatically decrease when price is above equilibrium; A shortage occurs: a shortage occurs when price is below equilibrium (quantity demanded > quantity supplied), the opposite of this situation.