Theory of Demand and SupplyPYQ - Nov 2018Question 22 of 20

Contraction of demand is the result of:

Options

ADecrease in the number of consumers

BIncrease in the price of the good concerned

CIncrease in the prices of other goods

DDecrease in the income of purchasers

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Correct Answer

✅ Option b — Increase in the price of the good concerned

All Options:

ADecrease in the number of consumers
BIncrease in the price of the good concerned
CIncrease in the prices of other goods
DDecrease in the income of purchasers

Detailed Solution & Explanation

To understand contraction of demand, we need to consider the law of demand, which states that as the price of a good increases, the quantity demanded decreases, ceteris paribus. • The law of demand explains the inverse relationship between the price of a good and the quantity demanded. • Contraction of demand refers to a decrease in the quantity demanded of a good at all possible prices, which can be caused by various factors. • One key factor that leads to contraction of demand is an increase in the price of the good concerned, as this makes the good more expensive for consumers, leading them to buy less. The correct answer is right because an increase in the price of the good directly affects the quantity demanded, leading to a contraction of demand. • In contrast, a decrease in the number of consumers or a decrease in the income of purchasers would lead to a decrease in demand, but not contraction of demand at all possible prices. • An increase in the prices of other goods may not necessarily lead to a contraction of demand for the good concerned, as it depends on whether the other goods are substitutes or complements.

About This Chapter: Theory of Demand and Supply

Paper

Paper 4: Business Economics

Weightage

10%

Key Topics

Law of Demand/Supply, Elasticity, Consumer Behavior

One of the most important chapters in the entire CA Foundation Economics paper. It covers the Law of Demand, Law of Supply, Elasticity of Demand (Price, Income, and Cross), Consumer Behavior (Cardinal and Ordinal approaches), and the concept of Consumer Surplus. Understanding demand and supply curves and their shifts is essential for grasping market dynamics.

View Official ICAI Syllabus

Exam Strategy Tip

Master the difference between 'Change in Demand' (shift) and 'Change in Quantity Demanded' (movement). This distinction alone can secure 3-5 marks. Also practice Elasticity numerical calculations.

Related Comparison Tables

Change in Demand vs Change in Quantity Demanded: 5 Marks Guaranteed

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