Question

Consider the market for chicken. An increase in the price of beef will a. decrease the demand for chicken, resulting in a lower price and a smaller amount of chicken purchased in the market. b. decrease the supply of chicken, resulting in a higher price and a smaller amount of chicken purchased in the market. c. increase the demand for chicken, resulting in a higher price and a greater amount of chicken purchased in the market. d. increase the supply of chicken, resulting in a lower price and a greater amount of chicken purchased in the market.

Short answer

Answer: \( \boxed{\text{c}} \) An increase in the price of beef will increase the demand for chicken, resulting in a higher price and a greater amount of chicken purchased in the market.

Step-by-step solution

Option a

An increase in the price of beef will decrease the demand for chicken, resulting in a lower price and a smaller amount of chicken purchased in the market. This option suggests that the increase in the price of beef (a substitute for chicken) would decrease the demand for chicken. However, according to the concept of substitute goods, if the price of one good (beef) increases, the demand for its substitute (chicken) should increase as consumers tend to switch from the more expensive good to its cheaper alternative. Therefore, this option is incorrect.

Option b

An increase in the price of beef will decrease the supply of chicken, resulting in a higher price and a smaller amount of chicken purchased in the market. This option implies that the increase in the price of beef would decrease the supply of chicken, which would lead to higher chicken prices and lower quantities purchased. However, the price of beef does not directly affect the supply of chicken, so this option is also incorrect.

Option c

An increase in the price of beef will increase the demand for chicken, resulting in a higher price and a greater amount of chicken purchased in the market. This option is consistent with the concept of substitute goods, as it suggests that the increase in the price of beef (a substitute for chicken) will lead to an increase in the demand for chicken. As a result, the price of chicken will rise, and a larger quantity of chicken will be purchased in the market. This option is correct.

Option d

An increase in the price of beef will increase the supply of chicken, resulting in a lower price and a greater amount of chicken purchased in the market. This option suggests that the increase in the price of beef would increase the supply of chicken, which would lead to lower chicken prices and higher quantities purchased. However, similar to option b, the price of beef does not directly affect the supply of chicken, so this option is also incorrect. Based on the analysis, the correct answer is option c: An increase in the price of beef will increase the demand for chicken, resulting in a higher price and a greater amount of chicken purchased in the market.

Key concepts

Market Demand

When discussing markets, an essential concept to understand is market demand. This refers to the total quantity of a product that consumers are willing and able to purchase at different price levels. Market demand is influenced by various factors, such as consumer preferences, income levels, and the prices of related goods like substitutes or complements.

In the context of the chicken and beef market, chicken and beef are substitute goods. This means that if the price of beef increases, people may buy more chicken instead, as it becomes the cheaper alternative. This shift in purchasing behavior leads us to a rise in the market demand for chicken, as outlined in the correct option (c) from the exercise.

Understanding how markets react to changes in price and consumer preferences is critical for predicting demand shifts and their resulting impact.

Price Elasticity

Price elasticity measures how sensitive the quantity demanded of a good is to a change in its price. In simple terms, it is an indication of how much consumers will change their buying habits with a change in price. The concept is important for businesses to understand because it ties directly into their revenue and pricing strategies.

There are two main types of price elasticity: elastic and inelastic.

• Elastic demand means consumers will significantly change their quantity demanded with a small change in price.
• Inelastic demand means consumers are less responsive to price changes.

In the exercise, as the price of beef rises, the demand for chicken increases, suggesting that the beef market is somewhat elastic with respect to its close substitutes. This elasticity allows consumers to switch more readily between beef and chicken in response to a price change.

Consumer Behavior

Consumer behavior refers to the study of how individuals make decisions to spend their available resources on consumption-related items, including not just what they buy, but also why, when, and how often. Several factors influence this behavior, such as personal preferences, social influences, and economic situations.

Looking at the context of the exercise, an increase in beef prices influences consumer behavior by prompting them to switch to chicken, a less expensive substitute. This decision-making process showcases the practical application of the concept of substitutes in consumer behavior.

Understanding consumer behavior helps businesses and economists determine how price changes can affect demand for substitute goods, thus aiding in more accurate market predictions and enhanced strategic planning.