Demand & Supply — Set 5

Correct Answer: B. Change in income of the consumer

• **Change in income of the consumer** = A change in consumer income is a non-price factor that shifts the entire demand curve rather than causing movement along it. • **Income change = demand curve shifts** — For a normal good, rising income shifts the curve right; for an inferior good, it shifts left. • 💡 Wrong-option analysis: Change in price of the commodity: own-price change causes movement along the existing demand curve, not a shift of the curve itself; Change in quantity demanded: a change in quantity demanded is the result of an own-price change; it is not a cause of a curve shift; Change in market price only: market price changes cause movement along the curve, not a shift.

Correct Answer: A. Qualitative

• **Qualitative** = The Law of Demand is a qualitative statement because it only specifies the direction of change (demand falls when price rises) without stating the magnitude. • **Direction, not magnitude** — It says demand will fall when price rises but not by exactly how much; that requires elasticity analysis. • 💡 Wrong-option analysis: Statistical: statistical statements are based on data and probability; the Law of Demand is a general economic principle, not a statistical finding; Quantitative: a quantitative statement specifies how much change will occur; the Law of Demand only states direction; Mathematical: while mathematics can express the law, the law itself is a conceptual directional statement.

Correct Answer: D. When Price is above equilibrium

• **When Price is above equilibrium** = A surplus occurs when the market price is set too high, causing quantity supplied to exceed quantity demanded. • **Surplus = unsold inventory** — Sellers accumulate excess stock and are pressured to lower prices back to equilibrium. • 💡 Wrong-option analysis: When Price is below equilibrium: a price below equilibrium creates a shortage, not a surplus; At the equilibrium point: at equilibrium, quantity demanded equals quantity supplied; there is neither surplus nor shortage; When demand is infinite: infinite demand would create extreme shortage, not surplus.

Correct Answer: A. Infinite

• **Infinite** = A horizontal demand curve represents perfectly elastic demand (Ed = infinity); consumers buy any quantity at one specific price but zero if price rises even slightly. • **Ed = infinity (perfectly elastic demand)** — This is a theoretical extreme used to model conditions in perfectly competitive markets. • 💡 Wrong-option analysis: One: unitary elasticity (Ed = 1) is represented by a rectangular hyperbola, not a horizontal line; Less than one: inelastic demand curves slope steeply downward, not horizontally; Zero: zero elasticity (perfectly inelastic demand) is represented by a vertical line, not a horizontal one.

Correct Answer: D. Shift to the left

• **Shift to the left** = By definition, the demand for inferior goods falls as income rises because consumers can now afford better-quality substitutes. • **Leftward shift = decrease in demand** — As rural incomes grew in India, demand for coarse grains declined as people shifted to rice and wheat. • 💡 Wrong-option analysis: Remain stationary: the demand for an inferior good does not stay the same when income rises; it shifts leftward; Become vertical: becoming vertical would mean perfectly inelastic demand; a rise in income would not change the elasticity of demand in this way; Shift to the right: a rightward shift means demand increased; for inferior goods, demand decreases when income rises.

Correct Answer: B. Increase in the cost of production

• **Increase in the cost of production** = Higher production costs reduce profitability, causing firms to supply less at every price level, shifting the supply curve leftward. • **Higher costs = leftward supply shift** — Rising oil prices in 2022 increased transport and manufacturing costs, reducing supply across industries. • 💡 Wrong-option analysis: Increase in number of sellers: more sellers increase supply and shift the curve rightward, not leftward; Improvement in technology: better technology lowers cost, increases supply, and shifts the curve right; Decrease in taxes: lower taxes reduce costs and increase supply, shifting the curve rightward.

Correct Answer: C. Rare masterpiece paintings

• **Rare masterpiece paintings** = Rare masterpiece paintings have perfectly inelastic supply — no matter how high the price, the original artwork cannot be reproduced. • **Supply cannot increase regardless of price** — A Leonardo da Vinci original is unique; its supply is fixed at one unit forever. • 💡 Wrong-option analysis: Agricultural goods: agricultural supply is price-elastic in the long run; farmers plant more when prices rise; Manufactured goods: manufactured goods can always be produced in greater quantities if prices justify the cost; Perishable goods: while perishables have supply constraints due to short shelf life, supply can be increased through new harvests.

Correct Answer: B. 1.0

• **1.0** = If a 10% rise in price leads to exactly a 10% fall in quantity demanded, the elasticity is 1.0 — perfectly unitary elastic demand. • **Ed = % change in Qd / % change in P = 10/10 = 1.0** — In this case, total revenue remains unchanged. • 💡 Wrong-option analysis: Zero: zero elasticity means quantity does not change at all when price rises; the problem says quantity fell by 10%; 2.0: elasticity of 2 would require a 20% fall in quantity for a 10% price rise; only 10% fell; 0.5: elasticity of 0.5 would require only a 5% fall in quantity for a 10% price rise; the problem states a 10% fall.

Correct Answer: D. Law of Demand

• **Law of Demand** = The Law of Demand states that demand falls as price rises; Giffen goods violate this by showing demand rising when price rises. • **Giffen goods have upward-sloping demand curve** — This happens because the income effect (feeling poorer) overpowers the substitution effect for essential inferior goods. • 💡 Wrong-option analysis: Law of Diminishing Utility: this law states that each additional unit gives less satisfaction; Giffen goods do not violate this; Law of Supply: Giffen goods are a demand-side anomaly; they do not affect the Law of Supply; Law of Variable Proportions: this is a production law about factor combinations; it is unrelated to Giffen good demand behaviour.

Correct Answer: B. Price of the good itself

• **Price of the good itself** = A movement along the supply curve (change in quantity supplied) occurs only when the good's own market price changes. • **Own price change = movement along supply curve** — Other factors like technology, input costs, or government policy cause the entire supply curve to shift. • 💡 Wrong-option analysis: Technology: technology improvements shift the supply curve rightward (increase in supply); they do not cause movement along the existing curve; Government policy: taxes or subsidies shift the supply curve; they are not own-price changes; Input prices: changes in input costs shift the supply curve; higher input prices shift it left, lower input prices shift it right.