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CMA Foundation · Fundamentals of Business Economics and Management · The Fundamentals of Economics

The price of tea falls from ₹50 to ₹40 per packet, and a household increases its purchases from 10 packets to 14 packets a month, with income, tastes and other prices unchanged. Which statement best describes this behaviour?

This is a movement down along the demand curve, called an extension of demand. The household buys more tea because the price of tea itself fell, while income, tastes and other prices stayed constant. A shift of the curve would need a change in some other determinant.

  1. AA movement down along the demand curve, an extension of demandCorrect
  2. BA rightward shift of the demand curve, an increase in demand
  3. CA leftward shift of the demand curve, a decrease in demand
  4. DA movement up along the demand curve, a contraction of demand

Explanation

Only the good's own price changed, while other determinants stayed constant. This produces a movement along the same demand curve. A fall in price leads to higher quantity demanded, which is an extension of demand. A shift would require a change in a non-price determinant such as income or tastes.

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