Question

A firm sells​ 10,000 units of X per month at the market price of​ $10. There are many other firms in this industry producing the same variety of X. With all firms producing an identical​ product, each firm is a price taker in this market. Farah Mahmood and her friend Daniela​ Rodriguez, both students of​ economics, are debating the impact of a recent increase in the demand for X. Farah feels that the demand faced by each firm will shift to the right. This in turn will increase the market price. Daniela meanwhile is not sure how much the price will rise because she thinks that the immediate response to the higher demand will be a rightward shift in each​ firm's supply curve.

​Daniela's argument is flawed​ because:

A.she confuses consumer and producer surplus

B.she mistakenly assumes that the law of demand does not hold for X.

C an increase in price causes a movement along the supply​ curve, not a shift of the curve.

D.other firms can enter the market if demand increases and prevent existing firms from increasing supply.

E. she incorrectly assumes that the demand curve for X is shifting to the left.

Answer 1

"C"

this will not shift the demand curve only the movement along the supply curve and shift the demand curve to the right. to shift the supply curve we need change in labor supply, technology or other factors.