Question

What happens to quantity demanded when price is raised? \((\mathrm{LO} 3)\) a) It rises. b) It falls. c) It stays the same. d) It cannot be determined if it rises, falls, or stays the same.

Short answer

b) It falls.

Step-by-step solution

Choose the correct answer according to the Law of Demand

The Law of Demand states that the quantity demanded for a product falls as the price rises, keeping other factors constant (ceteris paribus). So, when the price is raised, the quantity demanded will fall. Therefore, the correct answer is: b) It falls.

Key concepts

Quantity Demanded

In microeconomics, the term quantity demanded refers to the total amount of goods or services that consumers are willing and able to purchase at a given price during a certain period of time. This concept is a fundamental aspect of the Law of Demand, which indicates that there is an inverse relationship between the price of a product and the quantity demanded by consumers. This relationship is often depicted as a downward-sloping curve on a graph, with price on the y-axis and quantity on the x-axis.

Imagine a scenario where a new smartphone model is released. If the price is set very high initially, fewer people might be able or willing to buy it. However, if the price drops, say during a sale event, more consumers might decide that they can afford it, and thus the quantity demanded increases. This simple interaction between price and quantity demanded is essential to understanding market dynamics and consumer behavior.

Price Elasticity

The concept of price elasticity relates to how sensitive the quantity demanded of a good is to a change in its price. Price elasticity is a measure used by economists to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

Price elasticity can be broadly categorized into three types:

• Elastic demand: where a small change in price leads to a large change in quantity demanded.
• Inelastic demand: where a large change in price is needed to affect the quantity demanded significantly.
• Unitary elasticity: where a change in price leads to a proportional change in quantity demanded.

If the price elasticity of demand for a product is high, it suggests that consumers are quite sensitive to price changes, which can be crucial information for businesses when setting prices. Conversely, a low price elasticity implies that consumers are not very responsive to price changes, possibly due to the lack of available substitutes or because the product is a necessity.

Microeconomics Concepts

Microeconomics is the branch of economics that studies individual agents and markets, as opposed to macroeconomics, which focuses on the economy as a whole. Key microeconomics concepts include not only the Law of Demand and price elasticity, as previously discussed, but also supply, market equilibrium, opportunity cost, and marginal analysis, among others.

Within this field, the actions and interactions of individual consumers and businesses are scrutinized to understand decision-making processes. For instance, opportunity cost considers the next best alternative forgone when making an economic decision. Market equilibrium occurs when the quantity supplied equals the quantity demanded, often leading to a stable market price. And marginal analysis evaluates the additional benefits of an activity compared to the additional costs incurred. These concepts help explain how resources are allocated and prices are determined, which ultimately influence distribution of goods and services in an economy.