Question

Each of the following may lead to a change in the demand for product A except __________. (LO2) a) a change in the price of product \(\mathrm{A}\) b) a change in people's taste for product \(A\) c) a change in people's incomes d) a change in the price of product B (a substitute for product A)

Short answer

The correct answer is option a) A change in the price of product A, as it directly affects the quantity demanded, not the demand itself. The demand curve remains unchanged, and only the position along the demand curve changes as a result of price change.

Step-by-step solution

Option a) A change in the price of product A

A change in the price of product A directly affects its demand. Higher prices will lead to a decrease in demand, whereas lower prices will lead to an increase in demand.

Option b) A change in people's taste for product A

If people's taste for product A changes, it can lead to a change in its demand. For example, if consumers suddenly start to prefer a different product, the demand for product A will decrease.

Option c) A change in people's incomes

An increase in people's incomes will make them more capable of buying product A, leading to an increase in its demand. Conversely, a decrease in people's incomes will lead to a decrease in demand for product A.

Option d) A change in the price of product B (a substitute for product A)

A change in the price of product B, a substitute for product A, can also lead to a change in the demand for product A. If the price of product B increases, people might shift their consumption to product A, leading to an increase in its demand. Conversely, if the price of product B decreases, people might shift their consumption to product B, leading to a decrease in demand for product A.

Conclusion

Based on the analysis, it is clear that option a) A change in the price of product A does not lead to a change in the demand for product A. Instead, a change in price directly affects the quantity demanded, not demand itself. The demand curve remains unchanged, and only the position along the demand curve changes as a result of price change. Therefore, the correct answer is option a.

Key concepts

Demand Curve

The demand curve is a fundamental concept in economics that visually represents how the quantity demanded of a good varies with its price. Typically, the demand curve slopes downward from left to right. This illustrates the law of demand, which states that, all other factors being equal, as the price of a product decreases, the quantity demanded increases, and vice versa.

If you picture the demand curve on a graph, the vertical axis represents the price of the good, while the horizontal axis shows the quantity demanded. A movement along the demand curve happens when there is a change in the price of the good itself. For instance, if the price of product A changes, we move to a different point on the same demand curve — the curve itself doesn’t shift.

An important distinction to make is between a movement along the demand curve and a shift in the demand curve. A shift in the demand curve occurs when factors other than the price of the good change, leading to a change in demand. These factors can include changes in consumer preferences, income levels, or the prices of related goods.

Substitute Goods

Substitute goods are products or services that can be used in place of each other. When two goods are substitutes, an increase in the price of one will often lead to an increase in the demand for the other. This is because consumers will choose the more cost-effective option among the two.

Consider products A and B, which are substitutes. If the price of product B rises, consumers may purchase product A instead, assuming it offers similar satisfaction or utility. Consequently, the demand for product A increases as more consumers opt for it over the more expensive product B.

The relationship between substitute goods is crucial for understanding how broader market changes can affect individual product demand. It's important to note that substitute goods can differ across markets and consumer preferences, but their price relationship often impacts demand curves of both goods. Thus, observing changes in the prices of substitute goods helps businesses and economists predict and understand shifts in demand.

Income Effect

The income effect reflects how changes in a consumer's income affect the quantity of a good they demand. When a consumer’s income increases, they have more purchasing power, which typically leads to an increase in demand for normal goods because consumers can afford to buy more.

For example, if people's income rises, they are more likely to purchase greater quantities of product A, assuming it's a normal good. Conversely, if their incomes decrease, they may cut back on purchasing product A, leading to reduced demand.

The income effect can interact with the substitution effect, which is how consumers react to changes in the relative prices of goods. Together, these effects help explain consumer choice patterns. For instance, if a product becomes cheaper and people's income allows for more spending, the combined effects could significantly boost demand.

• An increased income boosts demand for normal goods.
• A decreased income reduces demand for these goods.
• The income effect is critical for businesses when planning pricing and marketing strategies.

Understanding both the income and substitution effects offers a comprehensive view of how and why demand shifts, beyond just price movements.