Demand, Supply and How Markets Work: Question 6

Worked solution

Step 1: Identify what has actually changed

Only the price of sourdough loaves themselves has changed, from $4 to $6. The stem tells us that incomes, tastes and every other influence on demand are unchanged, so nothing has shifted the demand curve. Buyers are simply reacting to the new price.

Step 2: Apply the vocabulary for movements along the demand curve

When the price of a good changes and every other influence on demand stays the same, buyers move to a different point on the same demand curve:

• A rise in price causes a contraction in demand. Quantity demanded falls.
• A fall in price causes an extension in demand. Quantity demanded rises.

Here the price of a loaf rises and the quantity demanded falls, so this is a contraction in demand.

Step 3: Rule out the other options

• “An extension in demand” (option A) is the opposite movement to what is described: it happens when price falls and quantity demanded rises.
• “A decrease in demand” (option C) describes a leftward shift of the whole demand curve, which is caused by a non-price determinant such as falling income or changing tastes, not by the good’s own price, so it does not fit here.
• “A decrease in supply” (option D) describes sellers, not buyers, and the stem only describes customers buying fewer loaves, not the bakery offering fewer for sale.

Final answer

Rising price of a sourdough loaf, with nothing else changing, moves buyers along the existing demand curve to a point of lower quantity demanded. This is a contraction in demand, option B.