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MCQs on Law of Demand

This page contains multiple choice questions and answers on law of demand, which will help students in preparing for academic and competitive exams

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MCQs on Law of Demand

Law of demand is a fundamental principle of Economics, it states that quantity demanded is always inversely related to the price of the goods. In other words, with increase in price, quantity demanded will be less and vice versa.

Following are some of the law of demand multiple choice questions and answers that will help the students in brushing up their understanding of the concept of law of demand.

Q1. The law of demand states, with increase in price there is

(a) decrease in quantity demanded

(b) increase in quantity demanded

(c) decreased demand

(d) increased demand

Answer: a Q2. The following would cause a change in the quantity demanded for a product?

(a) changing prices of related products

(b) changing consumer tastes

(c) increasing consumer income

(d) decreasing price of product

Answer: d Q.3 Increase in demand can occur due to:

(a) Increase in income of the consumer

(b) Decrease in price of the complementary good

(c) Increase in price of the substitutes

(d) All of these

Answer: d Q4. Violation of Law of Demand occurs when:

(a) Negative income effect is greater than substitution effect

(b) Negative income effect is less than substitution effect

(c) Income effect is negative

(d) Substitution effect is negative

Answer: a Q5. Movement along the demand curve illustrates

(a) shift in quantity demanded

(b) complement effect

(c) change in quantity demanded

(d) income effect

Answer: cQ6. Increase in demand is shown by demand curve when

(a) the curve shifts right

(b) the curve shifts left

(c) movement along the curve there is no change

(d) movement along the curve

Answer: aQ.7 The demand curve is always

(a) level (b) irregular (c) upward sloping

(d) downward sloping

Answer: dQ.8 Which of the following is a complement product to peanut butter?

(a) Sugar (b) Jelly (c) Mustard (d) Soda

Answer: bQ.9 The Law of Demand is measured from the perspective of

(a) Consumer (b) Shopkeeper (c) Wholesaler (d) Manufacturer

Answer: aQ.10 Goods for which demand goes down when income goes up are called

(a) Public Goods (b) Inferior Goods (c) Normal Goods (d) Private Goods

Answer: b

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[Solved] The law of demand states that:

The correct answer is option 3, i.e. as the price rises, the demand falls. Key Points Law of Demand -  The amount of a good that a consumer would

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The law of demand states that:

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IB ACIO Grade II Previous Paper 3 (Held On: 15 Sept 2013

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as the demand rises, the price rises

as the price rises, the demand rises

as the price rises, the demand falls

as supply rises, the demand rises

Answer (Detailed Solution Below)

Option 3 : as the price rises, the demand falls

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Detailed Solution

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The correct answer is option 3, i.e. as the price rises, the demand falls.

Key Points

Law of Demand - 

The amount of a good that a consumer would optimally choose is likely to increase when the price of the good falls and it is likely to decrease with a rise in the price of the good.

This means the price rises, the demand falls. Hence option 3 is correct.

However, this rule is not valid for high-value goods whose demand increases when the price rises.

A fall in the price of one commodity would cause an increase in the demand of the complementary commodity. For example, other factors being constant, fall in prices of sugar would increase the demand for tea and vice versa. This commodity is called the complementary commodity.

Substitute goods or competing goods are those which can be used in place of a commodity.

Tea and coffee are substitute goods. If there is a rise in the prices of tea, there is an increase in demand for coffee. This is called Substitution effect

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What Is the Law of Demand in Economics, and How Does It Work?

The law of demand states that quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded.

ECONOMICS GUIDE TO MICROECONOMICS

What Is the Law of Demand in Economics, and How Does It Work?

By ADAM HAYES Updated January 08, 2022

Reviewed by BRIAN BARNIER

Fact checked by KATRINA MUNICHIELLO

Jessica Olah / Investopedia

What Is the Law of Demand?

The law of demand is one of the most fundamental concepts in economics. It works with the law of supply to explain how market economies allocate resources and determine the prices of goods and services that we observe in everyday transactions.

The law of demand states that the quantity purchased varies inversely with price. In other words, the higher the price, the lower the quantity demanded. This occurs because of diminishing marginal utility. That is, consumers use the first units of an economic good they purchase to serve their most urgent needs first, then they use each additional unit of the good to serve successively lower-valued ends.

KEY TAKEAWAYS

The law of demand is a fundamental principle of economics that states that at a higher price, consumers will demand a lower quantity of a good.

Demand is derived from the law of diminishing marginal utility, the fact that consumers use economic goods to satisfy their most urgent needs first.

A market demand curve expresses the sum of quantity demanded at each price across all consumers in the market.

Changes in price can be reflected in movement along a demand curve, but by themselves, they do not increase or decrease demand.

The shape and magnitude of demand shifts in response to changes in consumer preferences, incomes, or related economic goods, NOT to changes in price.

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Law of Demand

Understanding the Law of Demand

Economics involves the study of how people use limited means to satisfy unlimited wants. The law of demand focuses on those unlimited wants. Naturally, people prioritize more urgent wants and needs over less urgent ones in their economic behavior, and this carries over into how people choose among the limited means available to them. For any economic good, the first unit of that good that a consumer gets their hands on will tend to be used to satisfy the most urgent need the consumer has that that good can satisfy.

For example, consider a castaway on a desert island who obtains a six-pack of bottled fresh water washed up onshore. The first bottle will be used to satisfy the castaway’s most urgently felt need, most likely drinking water to avoid dying of thirst. The second bottle might be used for bathing to stave off disease, an urgent but less immediate need. The third bottle could be used for a less urgent need, such as boiling some fish to have a hot meal, and on down to the last bottle, which the castaway uses for a relatively low priority like watering a small potted plant to keep him company on the island.

In our example, because each additional bottle of water is used for a successively less highly valued want or need by our castaway, we can say that the castaway values each additional bottle less than the one before. Similarly, when consumers purchase goods on the market, each additional unit of any given good or service that they buy will be put to a less valued use than the one before, so we can say that they value each additional unit less and less. Because they value each additional unit of the good less, they are willing to pay less for it. So the more units of a good that consumers buy, the less they are willing to pay in terms of the price.

By adding up all the units of a good that consumers are willing to buy at any given price, we can describe a market demand curve, which is always sloping downward, like the one shown in the chart below. Each point on the curve (A, B, C) reflects the quantity demanded (Q) at a given price (P). At point A, for example, the quantity demanded is low (Q1) and the price is high (P1). At higher prices, consumers demand less of the good, and at lower prices, they demand more.

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Demand vs. Quantity Demanded

In economic thinking, it is important to understand the difference between the phenomenon of demand and the quantity demanded. In the chart, the term “demand” refers to the light blue line plotted through A, B, and C. It expresses the relationship between the urgency of consumer wants and the number of units of the economic good at hand. A change in demand means a shift of the position or shape of this curve; it reflects a change in the underlying pattern of consumer wants and needs vis-à-vis the means available to satisfy them.

On the other hand, the term “quantity demanded” refers to a point along the horizontal axis. Changes in the quantity demanded strictly reflect changes in the price, without implying any change in the pattern of consumer preferences. Changes in quantity demanded just mean movement along the demand curve itself because of a change in price. These two ideas are often conflated, but this is a common error—rising (or falling) prices do not decrease (or increase) demand; they change the quantity demanded.

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