Demand & Supply — Set 5

Correct Answer: B. Change in income of the consumer

A change in income of the consumer shifts the entire demand curve — rightward for a normal good (income rises) or leftward (income falls). In contrast, a change in the price of the commodity itself causes a movement along the existing demand curve, not a shift. A shift in demand means consumers demand a different quantity at every price level. Other factors that shift the demand curve include prices of related goods, consumer tastes and preferences, future price expectations, and number of buyers in the market.

Correct Answer: A. Qualitative

The Law of Demand is qualitative because it only indicates the direction of change, not the exact amount. It tells us that demand will fall if price rises, but not by how many units. Quantitative details are instead provided by the concept of elasticity.

Correct Answer: D. When Price is above equilibrium

A surplus occurs when the market price is set too high, causing quantity supplied to exceed quantity demanded. Sellers find themselves with unsold inventory. To sell this excess, they are forced to lower prices, moving toward equilibrium.

Correct Answer: A. Infinite

The correct answer is 'Infinite'. This represents perfectly elastic demand, where consumers are willing to buy any quantity at one price but nothing if the price changes slightly. It is an extreme theoretical case used in the study of perfect competition. The slightest price rise would cause demand to vanish.

Correct Answer: D. Shift to the left

By definition, the demand for inferior goods falls as income rises because people can now afford better substitutes. This results in a leftward shift of the demand curve. It reflects a shift in consumer preference toward higher-quality alternatives.

Correct Answer: B. Increase in the cost of production

Higher production costs make it less profitable for firms to supply goods at current prices, causing a leftward shift. This represents a decrease in supply. Conversely, technological improvements or tax cuts would shift the curve to the right.

Correct Answer: C. Rare masterpiece paintings

Rare masterpiece paintings (like a Leonardo da Vinci or a Van Gogh) have perfectly inelastic supply — the supply cannot be increased regardless of how high the price goes, since the original artist is no longer alive. This is the most textbook exception to the Law of Supply. Agricultural goods in the short run and perishable goods are also exceptions, but their supply is not completely fixed. The supply of manufactured goods is generally elastic and responsive to price, so it follows the Law of Supply normally.

Correct Answer: B. 1.0

This is a case of unitary elasticity, where the percentage changes are identical. The ratio of the percentage change in quantity to the percentage change in price equals one. It represents a proportional consumer response to price changes.

Correct Answer: D. Law of Demand

The Law of Demand states that demand falls as price rises, but Giffen goods behave the opposite way. For these goods, consumption increases as the price goes up. This paradox occurs primarily under conditions of extreme poverty.

Correct Answer: B. Price of the good itself

A movement along the supply curve is called a change in 'quantity supplied,' and it only happens when the price of the commodity changes. Other factors like technology or input costs cause the entire curve to 'shift.' This is a basic rule of supply analysis.