Demand & Supply — Set 3

Correct Answer: A. Shift to the right

• **Shift to the right** = More sellers entering a market increase the total quantity of goods available at any given price, shifting the supply curve rightward. • **More sellers = rightward supply shift** — This leads to a higher supply, lower equilibrium price, and higher equilibrium quantity. • 💡 Wrong-option analysis: Shift to the left: a leftward shift means supply decreased; more sellers cause an increase, not a decrease; Remain the same: the supply curve does shift when new sellers enter; it cannot remain unchanged; Become vertical: a vertical supply curve indicates perfectly inelastic supply; adding more sellers does not create this.

Correct Answer: C. Horizontal

• **Horizontal** = A horizontal supply curve indicates perfectly elastic supply; producers are willing to supply any quantity at a fixed price but nothing below it. • **Es = infinity (perfectly elastic supply)** — In the long run under constant cost conditions, the industry supply curve approximates this shape. • 💡 Wrong-option analysis: Vertical: a vertical supply curve indicates perfectly inelastic supply (Es = 0); quantity does not respond to price changes; Downward sloping: a downward-sloping supply curve is not a standard supply curve shape; supply curves normally slope upward; Upward sloping: an upward-sloping supply curve is the normal case for supply, not the perfectly elastic case.

Correct Answer: A. Increase

• **Increase** = If consumers expect prices to rise in the future, they increase current purchases to stock up before prices climb. • **Future price expectations shift demand right** — This demand pull often creates a self-fulfilling prophecy as rising current demand does push prices up. • 💡 Wrong-option analysis: Remain the same: consumers react to price expectations; current demand is unlikely to stay unchanged when a price rise is anticipated; Become zero: demand would not fall to zero in response to a future price rise expectation; Decrease: a decrease would be rational if prices were expected to fall, not rise.

Correct Answer: C. Profit incentive at higher prices

• **Profit incentive at higher prices** = As the market price increases, the potential profit per unit grows, motivating firms to expand production and supply more. • **Higher price = greater profit incentive** — This is the fundamental economic incentive behind the upward-sloping supply curve. • 💡 Wrong-option analysis: Producers want to minimize profit: profit minimisation is not the goal of producers; they aim to maximise profit; Government regulations: regulations may affect supply but they are not the primary reason for the upward slope of the supply curve; Consumers want more at higher prices: higher prices actually reduce quantity demanded; this option confuses demand with supply.

Correct Answer: B. Shortage

• **Shortage** = A price ceiling is a government-imposed maximum price set below the equilibrium level, causing quantity demanded to exceed quantity supplied. • **Price ceiling below equilibrium = shortage** — Rent control laws are a classic example; rents are capped below market equilibrium, causing housing shortages. • 💡 Wrong-option analysis: Excess supply: excess supply (surplus) results from a price floor above equilibrium, not a price ceiling; Surplus: surplus also describes excess supply, which is caused by a price floor, not a ceiling; High equilibrium price: a price ceiling is meant to prevent high prices; it cannot cause an even higher equilibrium price.

Correct Answer: B. Surplus of production

• **Surplus of production** = A price floor (like MSP) set above equilibrium ensures farmers receive a minimum price, but it also causes quantity supplied to exceed demand. • **MSP above equilibrium = surplus** — The government often has to buy the surplus grain through agencies like FCI to clear the market. • 💡 Wrong-option analysis: Increase in demand: a price floor does not increase consumer demand; higher mandatory prices usually reduce consumer demand; Decrease in supply: producers are incentivised to supply more, not less, when a higher minimum price is guaranteed; Shortage of production: shortage occurs when price is below equilibrium; a price floor is above equilibrium.

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

• **Consumers buy more because they feel richer when prices fall** = The income effect describes how a fall in price raises the consumer's real purchasing power, allowing more to be bought. • **Real income rises when prices fall** — Even with the same nominal income, a lower price effectively increases what the consumer can afford. • 💡 Wrong-option analysis: Government increases taxes when income falls: this describes fiscal policy, not the income effect on consumer behaviour; Producers supply more when income rises: producers respond to price, not consumer income; this describes the supply side; Demand falls when population increases: this contradicts basic demand theory; population growth increases total market demand.

Correct Answer: B. Cheaper relative to other goods

• **Cheaper relative to other goods** = The substitution effect occurs when a fall in one good's price makes it relatively cheaper compared to its substitutes. • **Relative price change drives substitution** — Consumers shift spending toward the now-cheaper good and away from relatively more expensive alternatives. • 💡 Wrong-option analysis: Harder to find: scarcity makes a good more expensive, not cheaper; this would reduce demand; A luxury item: luxury items have high prices; calling a cheaper good a luxury contradicts the substitution mechanism; More expensive than others: if a good is more expensive than alternatives, consumers substitute away from it, not toward it.

Correct Answer: C. A lower price and same quantity

• **A lower price and same quantity** = With perfectly inelastic demand, the quantity demanded is fixed regardless of price; increased supply only drives the price down. • **Inelastic demand: supply shift changes price, not quantity** — Insulin demand is a real-world analogy; more supply lowers price but diabetics still need the same dose. • 💡 Wrong-option analysis: Same price and higher quantity: the price would fall because supply increased, so price cannot stay the same; A lower price and higher quantity: quantity cannot rise if demand is perfectly inelastic (vertical curve); the quantity demanded is fixed; A higher price and lower quantity: an increase in supply puts downward pressure on prices; it cannot raise price.

Correct Answer: D. Horizontal

• **Horizontal** = Market demand is obtained by adding the quantities demanded by all consumers at each price level — this is called horizontal summation. • **Horizontal summation adds quantities at each price** — At price Rs.10, if consumer A demands 5 units and B demands 3, market demand = 8 units. • 💡 Wrong-option analysis: Random: summation in economics is not random; it follows a systematic horizontal method; Diagonal: diagonal summation is not a standard method in demand curve aggregation; Vertical: vertical summation is used for public goods where benefits are added across consumers; individual demand curves are summed horizontally.