In Economics, Demand Implies Something Slightly Different from the Common Meaning of the Term GMAT Reading Comprehension

Reading Passage Question

In economics, demand implies something slightly different from the common meaning of the term. The layperson uses the term to mean the amount that is demanded of an item. Thus, if the price were to decrease and individuals wanted more of an item, it is commonly said that demand increases. To an economist, demand is a relationship between a series of prices and a series of corresponding quantities that are demanded at these prices. If one reads the previous sentence carefully, it should become apparent that there is a distinction between the quantity demanded and demand. This distinction is often a point of confusion. Demand is a relationship between price and quantities demanded, and therefore suggests the effect of one (e.g., price) on the other (e.g., quantity demanded). Therefore, knowledge of the demand for a product enables one to predict how much more of a good will be purchased if price decreases. But the increase in quantity demanded does not mean that demand has increased, since the relationship between price and quantity demanded (i.e., the demand for the product) has not changed. Demand shifts when there is a change in income, expectations, taste, etc., such that a different quantity of the good is demanded at the same price.

In almost all cases, a consumer wants more of an item if the price decreases. This relationship between price and quantity demanded is so strong that it is referred to as the “law of demand.” This “law” can be explained by the income and substitution effects. The income effect occurs because price increases reduce the purchasing power of the individual and, thus, the quantity demanded of goods must decrease. The substitution effect reflects the consumer’s desire to get the “best buy.” Accordingly, if the price of good A increases, the individual will tend to substitute another good and purchase less of good A. The negative correlation between price and quantity demanded is also explained by the law of diminishing marginal utility. According to this law, the additional utility the consumer gains from consuming a good decreases as successively more units of the good are consumed. Because the additional units yield less utility or satisfaction, the consumer is willing to purchase more only if the price of the good decreases.

‘In economics, demand implies something slightly different from the common meaning of the term’ is a GMAT reading comprehension passage with answers. Candidates need a strong knowledge of English GMAT reading comprehension.

This GMAT Reading Comprehension consists of 7 comprehension questions. The GMAT Reading Comprehension questions are designed for the purpose of testing candidates’ abilities in understanding, analysing, and applying information or concepts. Candidates can actively prepare with the help of GMAT Reading Comprehension Practice Questions.

Solutions and Explanation

1. Which of the following is an instance of a shift in demand as it is understood by economists?

1. A market is selling two pounds of coffee for the price it usually charges for one pound; the demand for coffee has increased.
2. The success of a television program featuring cartoon turtles has increased the demand for an oat cereal in turtle shapes.
3. Because of the rail strike, California lettuce costs more in Chicago, and the demand for lettuce has fallen.

1. I only
2. II only
3. III only
4. I and III only
5. I, II, and III

2. According to the passage, a change in demand, as economists use the term, would occur in which of the following situations?

1. The gasoline price increases, resulting in the increased sale of compact cars (whose price remains stable).
2. The gasoline price increases, resulting in the increased sale of compact cars (which go on sale in response to increased gas prices).
3. The gasoline price decreases on the same day that a new 43-mpg car enters the market.
4. A federal order imposes a price ceiling on gasoline.
5. A federal order lifts price regulations for gasoline.

3. Assume that firms develop an orangeflavored breakfast drink high in vitamin C that is a good substitute for orange juice but sells for less. Based upon assertions in the passage, which of the following would occur with respect to the demand for orange juice?

1. Health food stores would resurrect the law of diminishing marginal utility.
2. Assuming that the price of fresh orange juice remained constant, more orange juice would be consumed.
3. The law of demand would prevail.
4. Assuming that the price of fresh orange juice remained constant, the demand would not change.
5. There is not enough information in the passage to answer this question.

4. The purpose of the passage is to

1. introduce several important definitions.
2. outline the theory of supply on demand.
3. correct the layperson’s economic misapprehensions about prices.
4. introduce a student to a theory of marketing.
5. question a popular misunderstanding of “demand.”

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