Test: Demand Analysis - UGC NET MCQ

- Assertion: The assertion is true; generally, as the overall price level increases, consumers and businesses tend to demand less real GDP due to the higher costs.

- Reason: The reason is also true; when prices rise, the real income of consumers decreases, and they are unable to purchase as much, resulting in decreased spending.

- Explanation: The reason accurately explains the assertion, as the decrease in purchasing power directly contributes to the decrease in the quantity of real GDP demanded.

• The Assertion is true because the aggregate demand curve indeed slopes downward, reflecting the negative relationship between price levels and quantity demanded.
• The Reason is also true as it accurately describes one of the mechanisms that cause an increase in demand when the price level decreases.
• Since the Reason provides a correct explanation of why the Assertion is true, Option A is the correct choice.

The Law of Demand states that there is an inverse relationship between the price of a good and the quantity demanded, meaning that when prices rise, consumers are likely to purchase less of that good, and when prices fall, they tend to buy more. This principle is fundamental in economics and helps explain consumer behavior in response to market changes. Interestingly, this behavior can be observed in various markets; for example, during sales events, lower prices often lead to a significant increase in sales volume.

The kinked demand curve model is a significant concept in understanding price stability in oligopolistic markets.

- Statement 1 is correct because the model posits that firms are reluctant to change prices due to the expectation that competitors will not match price increases, leading to a loss of market share. Conversely, if a firm lowers its price, competitors are likely to follow, resulting in reduced profits for all firms involved.

- Statement 2 is also correct as the kinked demand curve reflects that the demand is more elastic above the kink (where price increases lead to a significant loss of customers) and less elastic below the kink (where price decreases do not lead to substantial gain in customers).

Thus, both statements accurately describe aspects of the kinked demand curve model, confirming that the correct answer is Option C: Both 1 and 2.

Statement 1 is correct because, in a competitive market, if one company raises its prices, customers will often switch to other companies offering lower prices, leading to a significant loss of market share for the company that increased prices.

Statement 2 is incorrect; it misrepresents the Law of Demand. The Law of Demand states that when the price of a product increases, the quantity demanded decreases, not increases.

Therefore, the correct answer is that only Statement 1 is accurate.

The law of demand asserts that there is an inverse relationship between price and quantity demanded. Specifically, when the price of a product rises, consumers tend to purchase less of that product, leading to a decrease in quantity demanded. Conversely, when prices fall, demand typically increases as consumers are more willing to buy at lower prices. This principle is foundational in understanding how markets function and helps to explain consumer behavior in various economic contexts. An interesting fact is that this relationship is often illustrated with a downward-sloping demand curve on a graph, where the x-axis represents quantity and the y-axis represents price.

The Law of Demand indicates that, all else being equal, a decrease in the price of a product or service leads to an increase in the quantity demanded by consumers. Conversely, an increase in price typically results in a decrease in the quantity demanded. This principle highlights the inverse relationship between price and quantity demanded, which is fundamental in economics. Understanding this relationship is crucial for businesses to set competitive prices and for policymakers to predict market reactions.

- The Assertion is true as consumer preference theory helps explain how consumers choose among different products based on their preferences and budget constraints.

- The Reason is also true but does not adequately explain the Assertion. While the demand curve does reflect changes in quantity demanded with price variations, it does not directly stem from consumer preferences alone; it also incorporates other factors.

- Therefore, Option B is correct as both statements are true, but the Reason does not serve as the correct explanation of the Assertion.

- The Assertion is true because the law of demand indeed states that when the price of a product decreases, the quantity demanded typically increases.

- The Reason is also true, but it does not explain the Assertion. The law of supply describes a relationship from the supplier's perspective, while the law of demand concerns consumer behavior.

- Thus, Option A is correct as both statements are true, yet the Reason does not provide an explanation for the Assertion.

The demand curve is graphically represented with the price of the item plotted on the vertical (y) axis and the quantity demanded on the horizontal (x) axis. This setup allows for a clear visualization of how changes in price influence the quantity that consumers are willing to purchase. By analyzing the demand curve, economists can better understand market dynamics and consumer preferences, which are vital for making informed business and policy decisions.