Answer to Question #121108 in Microeconomics for kamal

Question

The following sets of statements contain common errors. Identify and explain each error:
a. Demand increases, causing prices to rise. Higher prices cause demand to fall. Therefore, prices fall back to their original levels.
b. The supply of chicken meat in Pakistan increases, causing meat prices to fall. Lower prices always mean that Pakistani households spend more on meat.

Answer 1

a. Demand increases, causing prices to rise. Higher prices cause demand to fall. Therefore, prices fall back to their original levels.

Error: An increase in demand creates a new equilibrium point.

Explanation: The increase in demand will create a shortage in the market at the equilibrium price. To eliminate the shortage, the forces of demand and supply will act so that the price is pulled upwards, more is supplied until the demand is equal to the supply at a new equilibrium point.

b. The supply of chicken meat in Pakistan increases, causing meat prices to fall. Lower prices always mean that Pakistani households spend more on meat.

This is not true because the only way the spending on mean can decrease is when the proportionate change in the quantity purchased is less than the proportionate change in the price.