Question

Warrensburg is a small college town in Missouri. At the end of August each year, the market demand for fast food in Warrensburg a. remains constant, but we observe a movement upward and to the left along the demand curve. b. increases. c. decreases. d. remains constant, but we observe a movement downward and to the right along the demand curve.

Answer 1

Answer:

The correct answer is b. increases.

Explanation:

In a market that works as perfect competition (according to Microeconomics), an increase in demand (and the consequent decrease in inventories of producers) leads producers to increase their sales prices of their products, in order to also increase its level of production, until it equals demand (since at higher prices demand decreases) and this causes the market to balance, this is called economic equilibrium. In a competitive economy, producers can only increase their level of production if the sales prices of their products rise, the reason is that production costs increase with volume.

Excess demand occurs when there are imperfections in the market (such as when the Government sets maximum sales prices, at a price below the market equilibrium price) and for this reason the market does not reach equilibrium, where the quantity demanded and offered of the product are equal. When a market is in excess demand, the quantity demanded by consumers is greater than the quantity supplied by sellers, this causes the inventories of the producers to fall and they cannot increase their production.