Skip to content

IAI Actuarial Core Principles · Business Economics · How competitive markets operate

A pharmacy chain in Pune observes that when the price of a branded vitamin tablet strip falls from Rs 100 to Rs 90, the quantity sold rises from 2,000 to 2,400 strips a week, with no other changes. Which statement best describes this outcome?

The outcome is a movement along the demand curve. A fall in the product's own price, with everything else unchanged, raises quantity demanded, which is what the law of demand predicts. A shift would need a change in a non-price factor such as income or tastes.

  1. AA movement along the demand curve, consistent with the law of demandCorrect
  2. BA rightward shift of the demand curve caused by the price fall
  3. CA leftward shift of the demand curve because revenue changed
  4. DA violation of the law of demand because quantity rose by more than price fell
  5. A change in demand caused by a rise in consumer incomes

Explanation

A change in the good's own price, other factors constant, causes a movement along the existing demand curve (a change in quantity demanded). Price fell and quantity rose, which is exactly the law of demand. Option 1 is wrong because shifts require a change in a non-price determinant.

Did you get it right without looking?

One question tells you little. A timed set on How competitive markets operate shows your real accuracy, how long you take and where you lose marks.

Practise How competitive markets operateFree diagnostic mock

More How competitive markets operate questions