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CMA Foundation · Fundamentals of Business Economics and Management · Theory of Demand and Supply

A Pune bakery sells 120 loaves daily at ₹40 each. The price is raised to ₹50 and sales fall to 90 loaves, while nothing else changes. Later, a health campaign lowers sales to 70 loaves at the same ₹50 price. Which describes the two changes in order?

First there is a contraction of quantity demanded, because the own price rose and sales fell along the same curve. Then there is a decrease in demand, because sales fell further at an unchanged price due to a change in tastes, shifting the curve left.

  1. AContraction of quantity demanded, then decrease in demandCorrect
  2. BDecrease in demand, then contraction of quantity demanded
  3. CContraction of quantity demanded, then expansion of quantity demanded
  4. DDecrease in demand, then decrease in demand

Explanation

The price rise from ₹40 to ₹50 moves buyers up the same curve from 120 to 90 loaves, a contraction of quantity demanded. At the unchanged price of ₹50, sales fall from 90 to 70 because of a change in tastes, which shifts the curve left, a decrease in demand. Option two reverses the order.

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