Demand & Supply — Set 3

Correct Answer: A. Shift to the right

More sellers increase the total quantity of goods available in the market at any given price. This leads to a rightward shift in the market supply curve. It typically leads to a lower equilibrium price and higher quantity sold.

Correct Answer: C. Horizontal

A horizontal supply curve indicates that producers are willing to supply any amount at a specific price, but nothing at a lower price. This is a theoretical extreme often used in perfectly competitive market models. The elasticity coefficient in this case is infinite.

Correct Answer: A. Increase

If consumers expect prices to rise later, they often buy more now to avoid higher future costs. This causes an increase in current demand and shifts the demand curve to the right. Expectations are a powerful non-price determinant of market behavior.

Correct Answer: C. Profit incentive at higher prices

As the price increases, the potential for profit per unit grows, motivating firms to produce more. Additionally, higher prices allow firms to cover the increased costs of expanding production. This positive correlation creates the characteristic upward slope.

Correct Answer: B. Shortage

The correct answer is 'Shortage'. A price ceiling is a government-imposed maximum price set below the equilibrium level. Since the price is kept artificially low, the quantity demanded exceeds the quantity supplied. This often leads to black markets or non-price rationing.

Correct Answer: B. Surplus of production

The correct answer is 'Surplus of production'. A price floor is a minimum legal price set above the market equilibrium. It encourages producers to grow more while discouraging consumers from buying at higher prices. The resulting excess supply is often purchased by the government to support farmers.

Correct Answer: D. Consumers buy more because they feel richer when prices fall

When the price of a good decreases, the consumer's real purchasing power increases. This allows them to buy more of the good with the same amount of nominal income. It is one of the two main reasons why the demand curve slopes downward.

Correct Answer: B. Cheaper relative to other goods

The substitution effect occurs when consumers replace expensive items with cheaper alternatives. When a good's price drops, it becomes a more attractive option compared to its substitutes. This contributes to the law of demand's downward-sloping curve.

Correct Answer: C. A lower price and same quantity

Since the quantity demanded is fixed (vertical curve), any shift in supply only changes the price. The quantity remain unchanged because consumers require the same amount regardless of cost. This highlights the vulnerability of consumers in inelastic markets.

Correct Answer: D. Horizontal

To find the market demand, economists add the quantities demanded by all individuals at each specific price. This process is called horizontal summation. It reflects the total desire for a good across the entire consumer base.