What would happen if the price of kayaks increased?
The Correct Answer and Explanation is:
If the price of kayaks increased, the effect would depend on the elasticity of demand for kayaks, which is the responsiveness of consumer demand to a change in price. In general, the following consequences could occur:
- Decrease in Quantity Demanded: According to the law of demand, as the price of kayaks increases, the quantity demanded by consumers would decrease, assuming all other factors remain constant. This is because kayaks have become more expensive, and some consumers may no longer be able to afford them or may choose to allocate their budgets to other goods.
- Substitution Effect: Consumers may look for alternatives to kayaks if their price rises significantly. For example, some people might consider other recreational activities like canoeing or paddleboarding, which could offer similar benefits. If substitutes for kayaks are readily available, the increase in price could lead to a larger shift in consumer behavior.
- Income Effect: As kayaks become more expensive, individuals’ real purchasing power decreases. If a person’s income doesn’t increase, they may no longer be able to afford to buy a kayak or may delay their purchase. This effect could further reduce demand.
- Elasticity of Demand: The impact on demand depends on the price elasticity of kayaks. If kayaks are considered a luxury item and are highly elastic, a price increase would lead to a large decrease in demand. However, if kayaks are inelastic, meaning there are few substitutes and consumers are willing to pay higher prices, the decrease in demand might be less significant.
- Long-Term Effects on the Market: In the long run, higher prices might reduce consumer participation in the kayak market. Manufacturers and sellers could respond by offering promotions, discounts, or cheaper models to regain customers, or they might adjust production to meet the new market conditions.
In summary, when the price of kayaks increases, the quantity demanded tends to decrease due to the substitution and income effects. However, the degree to which this happens depends on how elastic the demand for kayaks is.