Question

Each of the following may lead to a change in the demand for product A except (LO2) a) a change in the price of product \(\mathrm{A}\) b) a change in people's taste for product A c) a change in people's incomes d) a change in the price of product \(B\) (a substitute for product A)

Short answer

The correct answer is option (a): A change in the price of product A does not lead to a change in the demand for product A, as it only affects the quantity demanded. Options (b), (c), and (d) may lead to a change in the demand for product A due to changes in people's tastes, incomes, or the price of a substitute product.

Step-by-step solution

Option (a): A change in the price of product A

A change in the price of product A will change the quantity demanded but not the demand itself. The demand for a product is actually considered as the entire demand curve while the quantity demanded represents a specific point on the curve. Therefore, option (a) does not lead to a change in the demand for product A.

Option (b): A change in people's taste for product A

A change in people's taste for product A will affect its demand. If people prefer product A more, the demand for it increases. Conversely, if people prefer it less, the demand decreases. Thus, option (b) may lead to a change in the demand for product A.

Option (c): A change in people's incomes

A change in people's incomes can also affect the demand for product A. If people's income increases, they may be able to afford more of product A and its demand would increase. If their incomes decrease, they may cut back on the purchases of product A, resulting in a decrease in its demand. Therefore, option (c) may lead to a change in the demand for product A.

Option (d): A change in the price of product B (a substitute for product A)

A change in the price of product B, which is a substitute for product A, can influence the demand for product A. If the price of product B increases, people might switch to product A due to its lower price, resulting in an increase in product A's demand. Conversely, if the price of product B decreases, people might choose product B over product A, leading to a decrease in product A's demand. Hence, option (d) may lead to a change in the demand for product A. Based on the analysis, the correct answer is: Option (a): A change in the price of product A does not lead to a change in the demand for product A.

Key concepts

Price Elasticity of Demand

The price elasticity of demand is a very important concept in economics. It measures how much the quantity demanded of a good changes when its price changes. More specifically, it calculates the percentage change in quantity demanded in response to a percentage change in price. The formula is given by: \[ \text{Price Elasticity of Demand} = \frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Price}} \]Understanding this concept helps determine whether a product is elastic or inelastic:

• **Elastic Demand:** This occurs when a small change in price leads to a significant change in quantity demanded. For example, luxury goods often have elastic demand because consumers can easily avoid purchasing them if prices rise.
• **Inelastic Demand:** This occurs when a change in price leads to a small change in quantity demanded. Essential goods, like medication, tend to have inelastic demand since consumers have to buy them regardless of price.

When studying markets, knowing how sensitive consumers are to price changes can help businesses make informed pricing decisions.

Income Effect

The income effect relates to how changes in an individual's or household's income influence the demand for goods and services. With an income increase, people generally buy more of most goods, assuming their preferences stay the same. Conversely, a decrease in income typically leads to reductions in purchases. This effect can be broken down into two types of goods:

• **Normal Goods:** These are goods for which demand increases as income rises. Examples include organic food or more luxurious clothing brands.
• **Inferior Goods:** These are goods for which demand decreases as income rises. Consumers purchase less of these as they can afford to switch to better alternatives, such as opting for a car instead of using public transportation.

Understanding the income effect is crucial for businesses to tailor their products and pricing strategies based on their customers' income levels. Thus, when people's incomes change, businesses can predict shifts in demand and adjust their offerings accordingly.

Substitute Goods

Substitute goods are products that can be used in place of each other. When two goods are substitutes, the demand for one good will increase if the price of the other good rises, and vice versa. This relationship is crucial because it directly impacts market competition and consumer choices. Here are a few key points about substitute goods:

• **Price Influence:** If product A and product B are substitutes, an increase in the price of product B can lead to an increased demand for product A, as consumers switch to the cheaper option.
• **Consumer Preferences:** Sometimes consumer preference significantly impacts whether goods are considered true substitutes. For instance, butter and margarine are often viewed as substitutes, but some people may strongly prefer one over the other, even if prices change.
• **Market Strategy:** Companies carefully observe their competitors to adjust their strategies based on substitute products' pricing and availability.

Substitute goods play a vital role in shaping demand and can significantly affect a business's market position. A solid grasp of substitute goods helps companies anticipate market trends and adjust their tactics to maintain competitive advantage.