CA Foundation Exam > CA Foundation Questions > Contraction of demand is the result of :a)dec...
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Contraction of demand is the result of :
- a)decrease in the number of consumers.
- b)Increase in the price of the commodity concerned
- c)increase in the prices of other goods.
- d)decrease in the income of purchasers
Correct answer is option 'B'. Can you explain this answer?
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Contraction of demand is the result of :a)decrease in the number of co...
Explanation:
Contraction of demand refers to a decrease in the quantity demanded of a commodity due to an increase in its price. This can be explained by the law of demand, which states that when the price of a commodity increases, the quantity demanded of it decreases, ceteris paribus (all other things being equal).
Factors that lead to a contraction of demand:
1. Increase in the price of the commodity concerned: When the price of a commodity increases, the consumers tend to reduce their demand for it, as they find it relatively expensive compared to other options available in the market.
2. Increase in the prices of other goods: When the prices of complementary goods (goods that are consumed together) increase, the demand for the concerned commodity decreases. For example, if the price of petrol increases, the demand for cars will decrease.
3. Decrease in the income of purchasers: When the income of the consumers decreases, they tend to reduce their spending on luxury goods, leading to a contraction of demand.
4. Change in tastes and preferences: When the consumers' tastes and preferences change, they may shift their demand to other commodities, leading to a contraction of demand for the concerned commodity.
However, out of all these factors, the increase in the price of the commodity concerned has the most significant impact on the contraction of demand. This is because the law of demand is based on the inverse relationship between price and quantity demanded, which means that an increase in price will always lead to a decrease in quantity demanded, ceteris paribus.
Contraction of demand refers to a decrease in the quantity demanded of a commodity due to an increase in its price. This can be explained by the law of demand, which states that when the price of a commodity increases, the quantity demanded of it decreases, ceteris paribus (all other things being equal).
Factors that lead to a contraction of demand:
1. Increase in the price of the commodity concerned: When the price of a commodity increases, the consumers tend to reduce their demand for it, as they find it relatively expensive compared to other options available in the market.
2. Increase in the prices of other goods: When the prices of complementary goods (goods that are consumed together) increase, the demand for the concerned commodity decreases. For example, if the price of petrol increases, the demand for cars will decrease.
3. Decrease in the income of purchasers: When the income of the consumers decreases, they tend to reduce their spending on luxury goods, leading to a contraction of demand.
4. Change in tastes and preferences: When the consumers' tastes and preferences change, they may shift their demand to other commodities, leading to a contraction of demand for the concerned commodity.
However, out of all these factors, the increase in the price of the commodity concerned has the most significant impact on the contraction of demand. This is because the law of demand is based on the inverse relationship between price and quantity demanded, which means that an increase in price will always lead to a decrease in quantity demanded, ceteris paribus.
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Contraction of demand is the result of :a)decrease in the number of consumers.b)Increase in the price of the commodity concernedc)increase in the prices of other goods.d)decrease in the income of purchasersCorrect answer is option 'B'. Can you explain this answer?
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