Question

Which statement is true? \((\mathrm{LO1}, 2,4)\) a) A change in demand is the same thing as a change in the quantity demanded. b) The supply curve moves upward to the left. c) The law of demand is no longer valid. d) A rise in income will increase the demand for normal goods.

Short answer

The correct answer is statement (d): A rise in income will increase the demand for normal goods. This is because normal goods are those for which demand increases as income increases, and decreases as income decreases. The rest of the statements are false. A change in demand and a change in the quantity demanded are not the same. The supply curve typically moves upward from left to right, not to the left. The law of demand is still valid and essential for understanding consumer behavior.

Step-by-step solution

Statement a

A change in demand is the same thing as a change in the quantity demanded. This statement is false. A change in demand refers to a shift in the entire demand curve, which is caused by factors other than the price of the good (for example, changes in income, population, or preferences). On the other hand, a change in the quantity demanded refers to a movement along the demand curve, which is due to a change in the price of the good.

Statement b

The supply curve moves upward to the left. This statement is also false. The supply curve typically slopes upwards from left to right. This means as the price of a good or service increases, the quantity supplied increases. Suppliers are willing to produce more at higher prices.

Statement c

The law of demand is no longer valid. This statement is false. The law of demand is a fundamental economic principle that states that, all else being equal, as the price of a good or service decreases, the quantity demanded increases, and vice versa. The law of demand is still valid and very much relevant, as it is essential for understanding market dynamics and consumer behavior.

Statement d

A rise in income will increase the demand for normal goods. This statement is true. Normal goods are those goods for which demand increases as income increases, and the demand decreases as income decreases. In other words, normal goods have a positive income elasticity of demand. This behavior is typical for everyday goods and services that most people consume, such as food, clothing, and entertainment. When people have more income, they tend to consume more normal goods. In conclusion, the correct answer is statement (d): A rise in income will increase the demand for normal goods.

Key concepts

Change in Demand

Understanding the concept of change in demand is crucial for grasping how markets operate. Unlike a change in the quantity demanded, a change in demand refers to a shift of the entire demand curve. This occurs when there are alterations in consumer preferences, income levels, prices of related goods, or population demographics, among other non-price factors.

For instance, if a new study reveals that a certain food is healthier than previously thought, the demand for that food might increase as consumer preferences shift, leading to a rightward shift in the demand curve. Conversely, if a product falls out of fashion, the demand curve could shift to the left. It's important to note that these changes reflect the consumer's willingness and ability to purchase different quantities at every price level, not just a single point on the existing curve.

Quantity Demanded

The term 'quantity demanded' paints a picture of a specific amount of a good or service that consumers are ready to purchase at a given price. A change in the quantity demanded is represented as a movement along the demand curve, rather than a shift of the curve itself. This movement can be either upwards or downwards and is solely prompted by changes in the price of the good in question.

For example, if the price of a cup of coffee decreases, more people are likely to buy it, reflecting an increase in the quantity demanded, which is shown by moving to a different point on the same demand curve. However, if the price goes up, fewer people will buy coffee, indicating a decrease in the quantity demanded.

Normal Goods

In economics, normal goods are a category of consumer goods that experience an increase in demand as the incomes of individuals rise. When people have more disposable income, they tend to spend more on normal goods, which are considered necessities or conventional comforts. The positive relationship between income and demand for these goods is a key characteristic that distinguishes normal goods from inferior goods, whose demand decreases as income increases.

Naturally, some typical examples of normal goods include healthy food options, quality clothing, better housing, and more extensive healthcare. As a person's income grows, so does their consumption of these products, which signals an upward shift in demand for normal goods.

Income Elasticity of Demand

The income elasticity of demand measures how sensitive the demand for a good is to changes in consumer income. It's calculated by taking the percentage change in quantity demanded and dividing it by the percentage change in income. Goods can be classified based on their income elasticity:

• If the elasticity is greater than 1, the good is considered a luxury and demand increases rapidly with income.
• If the elasticity is between 0 and 1, the good is a necessity; demand increases with income but at a slower rate than income growth.
• If the elasticity is negative, the good is classified as inferior meaning that demand decreases as income increases.

For normal goods, the income elasticity of demand is positive, signifying that as income grows, so does demand for these goods. However, not all normal goods are equal. Some are essentials with relatively low-income elasticity, while others are more luxurious and have higher income elasticity.