Question

As price rises, ______. 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

d) Quantity demanded falls, and quantity supplied rises.

Step-by-step solution

Understand the Law of Demand

To solve this exercise, we must first know the law of demand. The law of demand states that there is an inverse relationship between the price of a good and the quantity demanded by consumers. That is, as the price of a good increases, the quantity demanded decreases, and as the price decreases, the quantity demanded increases.

Understand the Law of Supply

Next, we must know the law of supply. The law of supply states that there is a direct relationship between the price of a good and the quantity supplied by producers. That is, as the price of a good increases, the quantity supplied increases, and as the price decreases, the quantity supplied decreases.

Identify the correct option

Now we can apply the understanding of the laws of demand and supply to choose the correct option in the exercise. As price rises, we know from the Law of Demand that the quantity demanded falls (inverse relationship). At the same time, we know from the Law of Supply that the quantity supplied rises (direct relationship). Hence, the correct option is: d) Quantity demanded falls, and quantity supplied rises.

Key concepts

Law of Demand

The law of demand is a fundamental principle in economics which states that, all else being equal, as the price of a product increases, the quantity demanded by consumers decreases. Similarly, as the price decreases, consumers are typically willing to buy more, leading to an increase in the quantity demanded. This inverse relationship between price and quantity demanded can be represented graphically by a downward-sloping demand curve.

Understanding this concept is crucial for predicting consumer behavior in response to price changes. It assumes that consumers are rational and seek to maximize their satisfaction or utility from goods and services, within their budget constraints.

Quantity Demanded

Quantity demanded refers to the specific amount of a good or service that consumers are willing and able to purchase at a particular price over a certain period of time. It is not to be confused with demand, which represents the relationship between price and the quantity demanded across a range of prices.

The quantity demanded can change due to several factors, not just price alterations. These factors include changes in tastes and preferences, income levels, the price of substitute goods, and the price of complementary goods.

Shifts Versus Movement Along the Demand Curve

A change in the price of the good itself causes a movement along the demand curve, whereas changes in other factors shift the entire curve.

Law of Supply

In contrast to the law of demand, the law of supply describes the direct relationship between the price of a good and the quantity supplied. It states that producers are willing to sell more of a good at a higher price than at a lower price, assuming all other factors remain constant.

This behavior is captured by an upward-sloping supply curve, which graphically represents the law of supply. Such a curve is based on the assumption that, as the potential for profit rises with price, suppliers are incentivized to increase production or offer more of their goods to the market.

Quantity Supplied

Quantity supplied is the amount of a good or service that producers are willing and able to sell at a given price within a certain time frame. It's a specific point on the supply curve and varies directly with price, illustrating the law of supply in action.

However, quantity supplied can also be influenced by other factors, such as production costs, technology, and the prices of related goods.

Factors Affecting the Supply Curve

Changes in these non-price determinants can lead to an entire shift of the supply curve, whereas alterations in the price of the good cause a movement along it. For example, an improvement in technology could lower production costs and increase the quantity supplied at all price levels, shifting the supply curve to the right.