Page 35 Answer Key

Student booklet - Classwork – 2

M14/3/ECONO/SP1/ENG/TZ2/XX/M

Q. ‘Quantity demanded increases as price falls. Yet as demand falls, price falls.’ Using
Diagrams, explain whether these two statements contradict each other. [10 marks]

Guidelines for answer:

• Definitions of demand
• Law of demand
• Draw the diagram to show an increase in quantity demanded as price falls
• Draw a diagram to show a fall in price as demand falls
• Explain the contradiction in the statement

Answer:

• Definitions of demand

The statement ‘Quantity demanded increases as price falls’ refers to consumer’s response to a
change in the price of the product itself, other non-price determinants of demand remaining
constant.

The statement ‘as demand falls, price falls’ refers to consumer’s response to a change in non-
price determinants of demand, while the price of the product itself did not change initially.

Demand refers to consumers’ willingness and ability to buy a certain product at a certain price
over a period of time.

• Law of demand

The Law of demand states an inverse relationship between the price and the quantity
demanded.

As per the signaling and incentive functions of ‘Price mechanism’, consumers respond to a fall
in price by demanding more quantity of goods and services. Both income and substitution
effects can be attributed to the law of demand.

Ceteris Paribus other (non-price determinants) staying constant, a fall in price results in an
increase in quantity demanded, confirming the inverse relationship stated by the law of
demand, which can be shown through a diagram.
• Draw the diagram to show an increase in quantity demanded as price falls

For example, at the price of $6 per hot dog, consumers buy two hot dogs per day; the quantity demanded
is two. If, however, the price of a hot dog decreases to $4, then customers want to consume three hot
dogs: the quantity demanded moves rightward from two to three when the price falls from $6 to $4. 

The fall in price shows an extension in demand .

By graphing these combinations of price and quantity demanded, we can construct a demand
curve connecting the three points.
 Price of hotdogs ($)

Extension

Quantity demanded of hotdogs

• Draw a diagram to show a fall in price as demand falls

If the income of the consumer falls then they will stop buying the hot dogs daily, this refers as
non-price determinants that affects the demand of the hot dogs. So there will be a decreases in
the demand for hotdogs and the demand curve will show the contraction.