Explanation: Analyzing Market Movements

QUESTION

When the price of good X decreases, the most likely outcome in the market for good X is that the:

(1) supply of good X will decrease.
(2) demand for good X will increase.
(3) demand will decrease and supply will increase.
(4) quantity demanded of good X will increase. ✓ Correct Answer
(5) quantity supplied of good X will increase.

💡 Key Student Trap: To master this concept, you must distinguish between a change in the entire curve and a movement along the curve.

🔍 Step-by-Step Explanation

Understand the Trigger

The question specifies a change in the price of the good itself. In economics, when the price of a good changes, it causes a movement along the existing demand or supply curve, not a shift of the curve itself.

"Demand" vs. "Quantity Demanded"

📌 Demand: Refers to the entire curve. It only shifts if factors other than price change (e.g., consumer income or tastes).

📍 Quantity Demanded: Refers to a specific point on the curve. It changes only when the price of the good itself changes.

Applying the Law of Demand

According to the Law of Demand, there is an inverse (opposite) relationship between price and quantity demanded. As the price of good X decreases, consumers are incentivized to purchase more of it. Therefore, the quantity demanded increases.

Why the others are incorrect

(1), (2), and (3): These refer to changes in "Demand" or "Supply" (shifting the entire curve). Since price changes only cause a movement along the curve, these are incorrect.
(5): According to the Law of Supply, a decrease in price leads to a decrease in the quantity supplied (producers receive less revenue per unit), making this incorrect.

Question 09 – When the price of good X decreases, the most likely outcome in the market for good X is that the