Questions: Supply and Demand

Question 1

Consumer incomes rise significantly. What happens to the demand curve for a normal good?

• A. It shifts leftward — higher income reduces the need to buy this good
• B. It shifts rightward — consumers want more of it at every price
• C. Nothing changes — income is not a determinant of demand
• D. Quantity demanded increases along the existing curve as income rises

Answer: (B)

Income is a non-price determinant of demand, so a change in income shifts the entire demand curve. For a normal good, higher income means consumers want more at every price — a rightward shift. Note that option D is the classic confusion: a movement along the curve (change in quantity demanded) only occurs when the *price* of the good changes, not when income changes.

Question 2

When the price of gasoline rises, the demand for gasoline decreases.

• T. True
• F. False

Answer: False

This is the most common misconception in supply-demand analysis. A price change causes a *movement along* the demand curve — quantity demanded falls, but demand (the curve itself) has not changed. 'Demand' refers to the entire schedule of price-quantity combinations. Demand only *shifts* when a non-price factor changes (income, tastes, prices of related goods, etc.). The correct statement is: 'When the price of gasoline rises, the quantity demanded of gasoline decreases.'

Question 3

What is the difference between 'supply' and 'quantity supplied,' and why does the distinction matter?

Model answer: 'Supply' refers to the entire supply curve — the relationship between all possible prices and the quantities producers are willing to offer. 'Quantity supplied' is a specific number: the amount offered at one particular price. A price change moves along the curve (changes quantity supplied); a non-price factor like input costs shifts the entire curve (changes supply).

The distinction matters because policy analysis depends on it. If oil prices rise due to a supply shift (e.g., a cartel cuts production), we say supply fell — the whole curve moved left. If oil prices rise because demand increased, supply hasn't changed — we simply move up the existing supply curve to a higher quantity supplied. Conflating the two leads to circular reasoning and incorrect predictions about market behavior.