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CA Foundation · Business Economics · Theory of Demand and Supply

The price of electric cars in India falls sharply and the quantity demanded rises. Simultaneously, the government announces a large subsidy to buyers of electric cars, which raises the quantity buyers want at every price. Which description is correct?

Both effects occur together. The fall in the car's own price causes an extension, a movement down along the demand curve, while the subsidy raises demand at every price and shifts the curve rightward. Neither effect alone explains the full increase in purchases.

  1. AOnly a movement along the demand curve occurs
  2. BOnly a rightward shift of the demand curve occurs
  3. CAn extension along the curve due to the price fall, together with a rightward shift due to the subsidyCorrect
  4. DA contraction along the curve together with a leftward shift

Explanation

The own-price fall causes an extension of demand, which is a movement down along the curve. The subsidy is a non-price factor that increases demand at every price, so it shifts the curve to the right. Both effects occur together, so the first option ignores the shift and the second ignores the movement.

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