Question

As price rises, \((\mathrm{LOI}, 2)\) a) quantity demanded and quantity supplied both rise b) quantity demanded and quantity supplied both fall c) quantity demanded rises and quantity supplied falls d) quantity demanded falls and quantity supplied rises

Short answer

When the price of a good rises, the quantity demanded falls due to the law of demand, and the quantity supplied rises due to the law of supply. Therefore, the correct answer is \(d) \: quantity \: demanded \: falls \: and \: quantity \: supplied \: rises\).

Step-by-step solution

Analyze the options given

There are four options given. We need to find out which one correctly explains the relationship between price, quantity demanded, and quantity supplied.

Apply the law of demand

According to the law of demand, when the price of a good rises, the quantity demanded falls. This is because consumers are less likely to buy higher-priced goods, leading to a decrease in demand.

Apply the law of supply

According to the law of supply, when the price of a good rises, the quantity supplied rises. This is because suppliers are more likely to supply higher-priced goods, leading to an increase in supply.

Select the correct option

Based on the law of demand and the law of supply, when the price rises: 1. Quantity demanded falls. 2. Quantity supplied rises. The correct option is: d) quantity demanded falls and quantity supplied rises.

Key concepts

Understanding Quantity Demanded

When we talk about "quantity demanded," we're looking at how much of a product consumers are willing and able to buy at a given price. The key here is the relationship between price and demand. As prices rise, potential buyers often reevaluate their willingness and ability to purchase the product.

A fundamental economic principle, known as the law of demand, stipulates that as the price of a good increases, the quantity demanded typically decreases. This happens for a few reasons:

• Purchasing higher-priced items impacts a consumer's budget, limiting their buying power for those items.
• Consumers might turn to substitutes – cheaper alternatives that serve similar purposes.
• The perceived value might not align with the heightened cost, making the product less desirable.

Understanding this concept is crucial as it affects consumer choice and market demand overall.

Analyzing Quantity Supplied

On the flip side, "quantity supplied" refers to the amount of a product that producers are willing and able to sell at a certain price. In economics, the normal behavior observed is based on the law of supply.

The law of supply suggests that, all else being equal, the quantity of a good supplied rises as the market price increases. This behavior is driven by several incentives:

• Higher prices can lead to increased revenue, making it more attractive for businesses to produce and sell more.
• Producers have more capital to reinvest in production to capitalize on the higher prices.
• The opportunity cost of not supplying becomes more apparent when prices rise – leading firms to prioritize production.

This relationship is integral for understanding suppliers' reactions in the market and their strategies on maximizing profits.

Examining Price Changes in Economics

Price changes hold a significant position in economic analysis. They are dynamic and result from complex interactions in the market involving supply and demand.

When prices adjust, they send signals to both consumers and producers, influencing their behavior:

• When prices rise, as per the law of demand, consumers demand less of the higher-priced good.
• Simultaneously, due to the law of supply, suppliers are motivated to increase production to take advantage of the higher prices.
• Conversely, when prices drop, consumers are encouraged to buy more, while suppliers might reduce their output.

Understanding how these price signals work helps in predicting market behavior and in making informed strategic decisions. Changes in prices lead to adjustments in both demand and supply, working towards reaching equilibrium – the balance where the quantity supplied matches the quantity demanded.