Question

An increase in the demand for steak could be caused quickly by a(n) (LO2) a) fall in the price of steak b) increase in the supply of steak c) expectation of a future cutback in the supply of steak d) a decline in the price of chicken

Short answer

A quick increase in the demand for steak could be caused by the expectation of a future cutback in the supply of steak (option c). This is because consumers might decide to buy more steak now to avoid facing scarcity or higher prices later.

Step-by-step solution

Analyze Option (a) - Fall in the price of steak

According to the law of demand, when the price of a product decreases, demand for the product will increase if all other factors remain constant. In this case, a fall in the price of steak would lead to an increase in the demand for steak.

Analyze Option (b) - Increase in the supply of steak

An increase in the supply of steak would not directly lead to an increase in the demand for steak. The supply-side factor would affect the quantity of steak available, but it would not directly influence consumers' preferences or willingness to buy more steak. Therefore, option (b) is not the correct answer.

Analyze Option (c) - Expectation of a future cutback in the supply of steak

If consumers expect that there will be a future reduction in the supply of steak, they might decide to buy more steak now to avoid facing scarcity or higher prices later. This expectation could lead to a quick increase in the demand for steak. Therefore, option (c) could potentially be the correct answer.

Analyze Option (d) - A decline in the price of chicken

If the price of chicken, a substitute for steak, decreases, the demand for chicken will likely increase. However, a decline in the price of chicken might not necessarily lead to an increase in the demand for steak, as consumers might prefer cheaper chicken over steak. So, option (d) is not the correct answer.

Select the correct option

Based on our analysis of the four options presented, we can conclude that option (c) - "expectation of a future cutback in the supply of steak" is the most likely to quickly cause an increase in the demand for steak.

Key concepts

Law of Demand

The law of demand is a fundamental principle in economics. It states that all else being equal, the quantity demanded of a good will increase as the price decreases. Conversely, when the price increases, the quantity demanded tends to fall. This relationship is usually shown by a downward-sloping demand curve.

This concept can be visualized when you think about your own shopping behavior. If the price of a delicious dessert drops, you're more likely to buy a bit more than you would at a higher price. It's a simple yet powerful idea that can explain a lot about purchasing decisions.

The law of demand assumes that other factors influencing demand, such as consumer preferences or income, remain constant. When analyzing Option (a) in the exercise, a fall in the price of steak directly aligns with the law of demand, illustrating why we'd expect an increase in demand if steak becomes cheaper.

Price Elasticity

Price elasticity of demand is an essential concept for understanding how sensitive consumers are to price changes. It measures how much the quantity demanded of a good changes in response to a change in price.

If a small change in price leads to a significant change in quantity demanded, we say demand is elastic. On the other hand, if quantity demanded hardly changes with price fluctuations, the demand is inelastic.

Different goods have different levels of elasticity. For instance, luxury items often have elastic demand, while necessities like bread might have inelastic demand. Understanding elasticity helps businesses and policymakers make informed decisions regarding pricing and tax policies.

Substitute Goods

Substitute goods are products that can replace each other in use. For example, if you typically buy steak but find chicken is significantly cheaper, you might substitute chicken for steak in your meals.

This concept is crucial when examining Option (d) in the exercise. A decline in the price of chicken could lead to an increase in its demand, as consumers consider it a cheaper alternative to steak. However, this price change might reduce the demand for steak, demonstrating the interconnectedness of goods and consumer choices.

Substitutes play an integral role in the marketplace, as they provide consumers with choices and influence how sensitive the demand for a product might be in relation to price changes of another product.