Demand & Supply — Set 4

Correct Answer: B. Giffen Good

Giffen goods are rare, inferior products with no close substitutes, where the income effect outweighs the substitution effect. For extremely poor people, a price rise in a staple food might force them to stop buying meat and buy even more of the staple. This results in an upward-sloping demand curve.

Correct Answer: B. Direct relationship

Substitution goods have a direct relationship; if the price of Pepsi rises, the demand for Coke increases. Consumers shift their preference to the relatively cheaper alternative. This is represented by a positive cross-elasticity coefficient.

Correct Answer: A. Unitary (1)

On a straight-line demand curve, elasticity varies from infinity at the Y-axis to zero at the X-axis. The exact center of the line represents unitary elasticity. This geometric property is useful for quick elasticity estimations.

Correct Answer: D. Increases

The correct answer is 'Increases'. Following the Law of Supply, a higher price encourages manufacturers to produce more to maximize their profits. This assumes the cost of production has not risen proportionally. Market supply reflects this positive correlation between price and quantity.

Correct Answer: B. Price decreases

Better technology shifts the supply curve to the right by lowering production costs. With higher supply available in the market, the equilibrium price tends to fall. This allows more consumers to access the product at a lower cost.

Correct Answer: A. Fall in the price of the good

Expansion and contraction are movements along the curve caused solely by a change in the price of that specific good. A fall in price leads to an expansion of the quantity demanded. Other factors cause a 'shift' or an 'increase' in demand.

Correct Answer: A. Decrease in the price of the good itself

Contraction of supply happens when producers offer less of a good because its market price has fallen. It is represented by a downward movement along the existing supply curve. It reflects the reduced profit incentive for sellers.

Correct Answer: B. Its demand rises when price rises

The most distinctive characteristic of a Giffen good is that its demand increases when its price rises, creating an upward-sloping demand curve — the exact opposite of a normal good. This happens because Giffen goods are inferior goods on which low-income consumers spend a large portion of their income (like coarse grain). When the price rises, the income effect (consumer becomes poorer and buys more of the cheap staple) overwhelms the substitution effect. Sir Robert Giffen first observed this phenomenon in 19th century Ireland with potatoes.

Correct Answer: C. Inelastic

Salt is a basic necessity with a very low share in the total household budget and no close substitutes. Even a significant price change will not affect the quantity people use daily. This makes its demand relatively price inelastic.

Correct Answer: B. Shifts to the left

When the price of a complement (like ink) rises, it becomes more expensive to use the main good (like pens). Consequently, the demand for the main good decreases, shifting its curve to the left. This shows the interdependence of complementary markets.