Economics Test - 2

The correct answer is option (1) i.e Shift in demand curve 

Key Points

• Demand curve is the inverse relationship between quantity supplied of goods and its price, keeping other factors constant.
• Whenever there is a change in price of goodsthere is a movement along the demand curve. due to change in demand of goods.
• Whenever there is a change in other factors besides price, , the demand curve shifts
• Where there is increase in price of goods, there is a decrease in demand of goods as well and vice versa.
• Similarly, whenever there is increase in other factors like income of consumers, demand for goods increases due to increase in purchasing power and vice versa.
• Demand curve is downward sloping i.e higher the price of goods, consumers will be less willing to buy goods.

The correct answer is right

Key Points

• In the case of a normal good, demand increases as the income grow.
• That is an increase in income shifts the demand curve to the right.

• The reason for this is that with a higher salary, people can afford to buy more of any given good.
• And since people have unlimited wants, more is generally considered better.
• By contrast, in the case of an inferior good, demand decreases as income grows.
• That means an increase in income shifts the demand curve to the left.
• This holds for goods that are usually replaced as income grows.

Important Points

Since the question does not clarify the goods, you may consider them normal goods. 

The correct answer is option 3, i.e., Excess Supply

• When there is a difference between the price that consumer pay in the market and the value that consumers place on the product, then the concept of consumer surplus becomes a useful one to look at. 
• Consumer surplus is a measure of the welfare that people gain from consuming goods and services
• Consumer surplus is defined as the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay (i.e. the market price).

Demand curve, follows the law of demand which states that there is an inverse relationship between price and commodity. Thus abiding this law, when the prices of the commodity rises, its demand will decrease.

The correct answer is Paul M Sweezy

Key Points

• American economist Sweezy came up with the kinked demand curve hypothesis to explain the reason behind this price rigidity under oligopoly.
• According to the kinked demand curve hypothesis, the demand curve facing an oligopolist has a kink at the level of the prevailing price.
• This kink exists because of two reasons:

1. The segment above the prevailing price level is highly elastic.
2. The segment below the prevailing price level is inelastic.

• In the case of a product with a horizontal demand curve, elasticity is said to be perfectly elastic.
• When the price of a perfectly elastic good or service increases above the market price, the quantity demanded falls to zero.

The correct answer is Decreases.

Key Points Demand Curve: 

• The demand curve is a graph that illustrates the relationship between the price of a commodity or service and the quantity demanded over time.
• The price will display on the left vertical axis, and the amount needed on the horizontal axis, in a typical representation.

 Price Elasticity of Demand: 

• The price elasticity of demand is an economic measure of demand's sensitivity to price changes.
• Price elasticity of demand is a measurement of the change in quantity demanded as a result of a change in the price of a good or service.

Important PointsGraphical Representation of Elasticity of Demand on a demand Curve

It is evident from the above curve that as we move down along a demand curve with constant slope, the price elasticity of demand decrease

The correct answer is option (1) i.e Demand Schedule

• Demand for a good is represented by the whole demand schedule and demand curve. 
• Demand schedule is a table that enlists the amount of a good a consumer is willing and able to purchase at each price level in a given time period, when all other things are constant.
• The graphical representation of the demand schedule is called Demand Curve.
• Demand curve shows the maximum price a consumer is willing and able to pay for a good or service.
• Demand curve shows the marginal benefit that consumers receive from a unit of output.
• It indicates the opportunity cost of buying the good.

The correct answer is Shifts out.

Key Points

• The demand curve is shifted by the prices of complementary or replacement items.
• Substitute commodities are items that can be eaten instead of the original.
• When the price of substitute products rises, the demand curve shifts out.
• Tea and coffee are examples of substitute products.
• When the price of one item rises, the consumer adjusts his demand to the other (substitute) good, i.e. when the price of one good rises, the consumer shifts his demand to the other (substitute) good.
• If the price of a substitute good (coffee) increases, then the demand for the given commodity (tea) will rise as tea will become relatively cheaper in comparison to coffee.
• The demand curve changes parallel outwards to the right in this situation.

The correct answer is option 1, i.e. Equilibrium price will fall.

Key Points

• A decrease in demand and an increase in supply will cause a fall in Equilibrium price.
• Equilibrium is a state of no change and clearly, at the equilibrium price, both buyers and sellers are in a state of no change.
• Technically, at the equilibrium price, the quantity demanded by the buyers is equal to the quantity supplied by the sellers.
• The equilibrium price is determined by the market forces of demand and supply in a perfectively competitive market. 
• Market Demand is the sum total of demand for a commodity by all the buyers in the market whereas Market Supply is the sum total of supplies of a commodity by all the firms in the market.