Decide if the following statements are TRUE or FALSE. If they are FALSE, explain why.
a) The market supply curve is the vertical sum of all individual supply curves of all firms in the economy.
b) The demand curve is downward sloping, depicting an inverse relationship between price and quantity demanded.
c) Quantity demanded is the quantity of a good that consumers are able to purchase at a particular price.
d) According to the law of supply, supply will rise when product price rises.
The correct answer and explanation is :
Here are the answers to the given statements:
a) FALSE – The market supply curve is the horizontal sum of all individual supply curves of firms in the economy, not the vertical sum. The market supply curve is derived by adding the quantities supplied by all firms at each price level, rather than summing the prices at each quantity.
b) TRUE – The demand curve is typically downward sloping, indicating an inverse relationship between price and quantity demanded. This means that when the price of a good decreases, the quantity demanded increases, and vice versa. This relationship is due to the income effect, substitution effect, and diminishing marginal utility.
c) FALSE – Quantity demanded refers to the amount of a good that consumers are willing and able to purchase at a specific price, not just what they are able to buy. Demand is influenced by factors such as price, income, preferences, and the prices of related goods.
d) TRUE – According to the law of supply, there is a direct relationship between the price of a good and the quantity supplied. This means that as the price of a product rises, firms are incentivized to produce and supply more of it, assuming other factors remain constant.
Explanation (300 Words)
The market supply curve is derived from individual firm supply curves, but it is summed horizontally, meaning that at each price level, the total quantity supplied by all firms is added together. This ensures an accurate representation of total market supply rather than summing prices.
The law of demand states that, all else being equal, as the price of a good falls, the quantity demanded rises. This occurs because consumers find the good more affordable and may substitute it for more expensive alternatives. Additionally, lower prices increase purchasing power, allowing consumers to buy more.
Quantity demanded should not be confused with demand. Demand refers to the entire relationship between price and quantity demanded, while quantity demanded refers to a specific amount at a particular price. Changes in price lead to movements along the demand curve, while factors like income, tastes, and prices of related goods shift the demand curve.
The law of supply explains that producers are willing to supply more at higher prices because increased prices often mean higher profits. This motivates firms to expand production and new firms to enter the market. Conversely, lower prices lead to reduced supply as firms cut back on production or exit the industry.
These principles are fundamental to understanding market dynamics in microeconomics.