Question

An increase in the demand for steak could be caused quickly by a(n) __________.(LO2) a) fall in the price of steak b) increase in the supply of steak c) expectation of a future cutback in the supply of steak d) a decline in the price of chicken

Short answer

An increase in the demand for steak could be caused quickly by a(n) expectation of a future cutback in the supply of steak (Option C). This is because people will be inclined to buy more steak now to avoid potential shortages in the future.

Step-by-step solution

Option A: Fall in the price of steak

A fall in the price of steak can potentially lead to an increase in the demand for steak. Lower prices would encourage people to buy more steak, as it has become more affordable. So, this option does contribute to an increase in the demand for steak.

Option B: Increase in the supply of steak

An increase in the supply of steak would mean that there is more steak available in the market. However, this alone does not necessarily lead to an immediate increase in the demand for steak. Increased supply does not always guarantee increased demand.

Option C: Expectation of a future cutback in the supply of steak

If there is an expectation of a future cutback in the supply of steak, people may start to buy and consume more steak due to the fear of limited availability in the future. This will lead to a quick increase in the demand for steak. Thus, this is a strong candidate for the answer.

Option D: A decline in the price of chicken

A decline in the price of chicken might make people buy more chicken due to its lower price. Hence, it may indirectly reduce the demand for steak. However, it would not lead to a quick increase in the demand for steak.

Conclusion

Based on the analysis of each option, Option C (expectation of a future cutback in the supply of steak) is the most likely to cause a quick increase in the demand for steak. This is because people will be inclined to buy more steak now to avoid potential shortages in the future.

Key concepts

Price Elasticity of Demand

When discussing the price elasticity of demand, we're talking about how responsive consumers are to changes in price for a particular good or service. It's a measure that reveals the degree to which the quantity demanded of something, like steak, will shift following a price alteration.

Steak, as a relatively expensive food item, might have a varying elasticity of demand based on several factors, including consumer preferences, income levels, and availability of substitutes such as chicken. When the price of steak falls, if the demand is elastic, consumers will significantly increase the quantity they purchase because they are sensitive to that price change. Conversely, if the demand is inelastic, the quantity demanded might not change much.

In our exercise, a lowered price could quickly surge steak demand, particularly if steak is priced elastically, suggesting consumers are waiting for such a price drop to purchase more.

Supply and Demand

The interplay of supply and demand forms the foundation of market economics. Supply represents how much the market can offer, while demand indicates the quantity consumers desire to buy.

Returning to our steak example, if farmers produce more steak, indicating an increase in supply, one might assume that more steak will be consumed. However, the increase in supply doesn't always equate to increased demand, as consumers' desire to purchase steak might remain unchanged regardless of the available quantity.

This dynamic relationship adjusts constantly due to diverse factors such as changes in production costs, global events, and shifts in consumer tastes. All these factors converge to determine the market price and quantity of goods like steak sold.

Market Equilibrium

Where supply and demand curves intersect, we find the market equilibrium. It's the point where the quantity of steak suppliers are willing to sell at a particular price matches exactly what consumers are willing to buy, leading to a stable market condition.

However, this balance can be disrupted if there's an expectation of a future reduction in the supply of steak. As our exercise solution highlighted, anticipating a supply cutback can quickly escalate demand as consumers rush to purchase steak before the shortage hits. At this point, the current equilibrium price is likely to increase because the existing demand exceeds supply, indicating a shift in market equilibrium.

In essence, market equilibrium is a temporary state, sensitive to changes in market assumptions and consumer expectations. A stable market for steak, as with any commodity, depends on steady supply and demand levels.