Question

Answer true or false, and if the statement is false, change it to make it true. Illustrate your answers on a demand and supply graph. a. An increase in demand is represented by a movement up the demand curve. b. An increase in supply is represented by a movement up the supply curve. c. An increase in demand without any changes in supply will cause the price to rise. d. An increase in supply without any changes in demand will cause the price to rise.

Short answer

a. An increase in demand is represented by a movement up the demand curve. b. An increase in supply is represented by a movement up the supply curve. c. An increase in demand without any changes in supply will cause the price to rise. d. An increase in supply without any changes in demand will cause the price to rise. Answer: c. An increase in demand without any changes in supply will cause the price to rise.

Step-by-step solution

a. Statement Analysis

The statement claims that an increase in demand is represented by a movement up the demand curve. This statement is false. An increase in demand is actually represented by a rightward shift in the entire demand curve, not just a movement up a fixed curve.

a. Demand Graph Illustration

To illustrate the true scenario for an increase in demand, follow these steps: 1. Draw two axes: Price (P) on the vertical axis and Quantity (Q) on the horizontal axis. 2. Draw a downward-sloping demand curve D1. 3. To show an increase in demand, draw a new demand curve D2, shifted to the right from D1. Do not move up on the original demand curve.

b. Statement Analysis

The statement claims that an increase in supply is represented by a movement up the supply curve. This statement is false. An increase in supply is actually represented by a rightward shift in the entire supply curve, not just a movement up a fixed curve.

b. Supply Graph Illustration

To illustrate the true scenario for an increase in supply, follow these steps: 1. Draw two axes: Price (P) on the vertical axis and Quantity (Q) on the horizontal axis. 2. Draw an upward-sloping supply curve S1. 3. To show an increase in supply, draw a new supply curve S2, shifted to the right from S1. Do not move up on the original supply curve.

c. Statement Analysis

The statement claims that an increase in demand without any changes in supply will cause the price to rise. This statement is true.

c. Price Increase Illustration

To illustrate the true scenario for an increase in demand causing a price rise, follow these steps: 1. Draw two axes: Price (P) on the vertical axis and Quantity (Q) on the horizontal axis. 2. Draw a downward-sloping demand curve D1 and an upward-sloping supply curve S1. The intersection between D1 and S1 represents the initial equilibrium price (P1) and quantity (Q1). 3. Draw a new demand curve D2, shifted to the right from D1, to represent an increase in demand. 4. The new intersection between D2 and S1 represents the new equilibrium price (P2) and quantity (Q2). The difference between P2 and P1 will indicate the increase in price due to the increase in demand.

d. Statement Analysis

The statement claims that an increase in supply without any changes in demand will cause the price to rise. This statement is false. An increase in supply without any changes in demand will actually cause the price to decrease, not rise.

d. Price Decrease Illustration

To illustrate the true scenario for an increase in supply causing a decrease in price, follow these steps: 1. Draw two axes: Price (P) on the vertical axis and Quantity (Q) on the horizontal axis. 2. Draw a downward-sloping demand curve D1 and an upward-sloping supply curve S1. The intersection between D1 and S1 represents the initial equilibrium price (P1) and quantity (Q1). 3. To show an increase in supply, draw a new supply curve S2 shifted to the right from S1, with demand curve D1 unchanged. 4. The new intersection between D1 and S2 represents the new equilibrium price (P2) and quantity (Q2). The difference between P1 and P2 will indicate the decrease in price due to the increase in supply.

Key concepts

Demand Curve Shift

Let's delve into understanding what it truly means for a demand curve to shift. Typically, a demand curve is a graphical representation that shows the quantity of a product consumers are willing to buy at various prices. However, the curve itself isn't static. A shift in this curve indicates a change in demand that isn't related directly to the product's price.

**Rightward Shift of Demand Curve** When we say the demand curve shifts to the right, it means there is an increase in demand for a product at all price levels. This is not a movement along the curve but rather the entire curve moving to the right. Causes of a rightward shift can include factors like an increase in consumer income, a change in consumer preferences favoring the product, or a rise in the price of a substitute good.

• An increase in demand results in more buyers wanting the product at the same price, pushing the curve right.
• Economic conditions, like increased consumer income, often trigger this kind of shift.
• The graphically represented increase causes a new equilibrium with a higher price and higher quantity.

Supply Curve Shift

Just like the demand curve, the supply curve can also shift, portraying changes in how much of a product suppliers are willing and able to offer at various price points. An upward-sloping line, the supply curve, shows that higher prices typically encourage increased output from suppliers. A shift in the curve reflects changes in supply due to factors other than price.

**Rightward Shift of Supply Curve** An increase in supply is characterized by a rightward shift of the whole supply curve. It indicates that suppliers are ready to sell more of the product at the same prices than before. Various factors could cause this shift, such as improvements in technology, reductions in production costs, or government subsidies.

• With more of the product available at the same cost, the supply curve still moves to the right.
• Technological advances often lead to increased efficiency, thus increasing supply.
• A rightward shift leads to a new equilibrium with a lower price, assuming demand remains constant.

Equilibrium Price and Quantity

The equilibrium price and quantity refer to the price and quantity of goods or services that truly balance the amount consumers are willing to buy with the amount producers are willing to sell. It is vital to understand how shifts in either the demand or supply curve affect these equilibria.

**Effects of Demand Curve Shift** When the demand curve shifts right, without a corresponding supply change, the equilibrium price and quantity move to a higher level. This happens because more consumers are now interested in purchasing the product, creating a new intersection point with the supply curve.

• Increased demand leads to higher equilibrium prices and quantities.
• These shifts signify a healthy, expanding market for the product.

**Effects of Supply Curve Shift** Conversely, if the supply curve shifts right and demand remains unchanged, the equilibrium price decreases while the equilibrium quantity increases. More product supply leads to enough quantity to meet existing demand but at reduced prices.

• Greater supply naturally results in lower prices and higher quantities.
• This can be beneficial to consumers, making it possible to buy more for less.