Question

9

Critically evaluate: "In comparing the two equilibrium positions in the diagram below, I note that a smaller amount is actually demanded at a lower price. This refutes the law of demand." D, D2 Quantity

Options for

A=surplus or shortage

B= rise or fall

C= increase/decrease

D= increase/decrease

E=lower/higher and lower/higher quantity

F=yes/no

G=because there was a change in demand/because the new equilibrium has a lower price and quantity

Answer 1

1. Surplus

A Decrease in demand leads to surplus of commodity/product in market.

2. Fall

Decrease in demand leads to decrease in price.

3. Decrease

As price falls, quantity demanded shifts, decreasing demand to D2 curve.

4. Decrease

Now as supply forces move as per demand supply forces, the demand for the product decrease.

5. Lower price, Lower Quantity

New equilibrium establishes at lower price and lower quantity.

6. No

7. Because there was a change in demand

As per the law of demand, price decrease must lead to an increase in the price. In this case, when demand decreased, prices of the product increased (as supply side factors take time lag to adjust because of stickyness). However the market forces balances the imbalance and a decrease in supply shifts the equilibrium.