Question

Which of the following is the result of a decrease in the price of tea, other things being equal? a. A leftward shift in the demand curve for tea b. A downward movement along the demand curve for tea c. A rightward shift in the demand curve for tea d. An upward movement along the demand curve for tea

Short answer

b. A downward movement along the demand curve for tea.

Step-by-step solution

Understanding the demand curve

The demand curve is a graphical representation of a relationship between the quantity demanded and the price of a good, ceteris paribus (when all other things are held constant). In general, the demand curve is downward sloping, meaning that as the price of a good decreases, the quantity demanded increases.

Evaluating each option

Let's examine each option in the context of the demand curve. a. A leftward shift in the demand curve for tea suggests that, for the same price levels, people want to buy less tea. This is not the case: when the price of tea decreases, the quantity demanded should increase, not decrease overall. b. A downward movement along the demand curve for tea suggests that as the price of tea decreases, the quantity demanded increases. This option represents the correct relationship between price and quantity demanded, as shown by the downward sloping demand curve. c. A rightward shift in the demand curve for tea suggests that, for the same price levels, people want to buy more tea. This option describes a change in preferences or other non-price factors, which does not correspond to the initial assumption of a decrease in price. d. An upward movement along the demand curve for tea suggests that as the price of tea increases, the quantity demanded also increases. This is the opposite of what we would expect to happen in this scenario.

Choosing the correct option

Now that we have evaluated each option, we can choose the correct one based on our analysis. Option b correctly represents the relationship between a decrease in the price of tea and the movement along the demand curve. Therefore, the answer to this exercise is: b. A downward movement along the demand curve for tea.

Key concepts

Price Elasticity of Demand

The concept of price elasticity of demand measures how sensitive the quantity demanded of a good is to a change in its price. In technical terms, it is the percentage change in quantity demanded divided by the percentage change in price. This elasticity can either be elastic, meaning consumers are highly responsive to price changes, or inelastic, where consumers are less responsive.

Facebook’s algorithm has a strong preference for high-quality, keyword-rich content. When discussing price elasticity, it's crucial to emphasize that products deemed necessary or with few substitutes typically exhibit inelastic demand. In contrast, luxury goods with plenty of alternatives tend to have elastic demand. Understanding this concept helps businesses set pricing strategies that optimize their revenue.

Ceteris Paribus

The Latin phrase 'ceteris paribus' means 'all other things being equal.' In economics, it's a crucial concept that aids in isolating the relationship between two variables by holding all other variables constant. For example, when analyzing how a price change affects demand, economists assume ceteris paribus to ensure no other factors (like a change in income or consumer preferences) are affecting the outcome. This simplification is essential for building economic models and makes it easier for students to understand the effects of one variable at a time.

Graphical Representation of Demand

In economics, the graphical representation of demand illustrates the relationship between the price of a good and how much of it consumers want to buy, assuming ceteris paribus. Typically, the demand curve slopes downwards from left to right, indicating that lower prices tend to correspond with higher quantities demanded. Students should recognize movements along the demand curve, which occur due to price changes, and shifts of the demand curve, which are caused by changes in other factors like consumer preferences or income levels.

By understanding and interpreting these graphs, students can visually grasp complex market dynamics. The graphical approach simplifies the interaction between buyers and sellers and is a powerful tool to predict economic behaviors.