Question 25

When a TV show boosts demand for a hat, economists explain the price jump with the Law of demand.

The increase in demand for the hat due to its popularity in a TV show directly correlates with the Law of demand, which states that as demand for a good increases, the price typically rises, assuming supply remains constant.

A) Law of demand

This option is correct because the Law of demand illustrates that an increase in consumer interest or demand for a product, such as a hat featured on a TV show, will likely result in a higher price for that item. The relationship between demand and price is fundamental in economics, making this explanation relevant and accurate.

B) Comparative advantage

Comparative advantage refers to the ability of an entity to produce a good at a lower opportunity cost than another. While it is an important economic principle, it does not directly relate to the price changes resulting from demand shifts, such as those caused by a TV show.

C) Opportunity cost

Opportunity cost is the value of the next best alternative forgone when making a decision. Although it is a crucial concept in economics, it does not explain the price increase of the hat in this scenario, which is primarily driven by changes in demand rather than a decision-making trade-off.

D) Multiplier effect

The multiplier effect refers to the proportional increase in final income that results from an injection of spending. While it can relate to economic activity, it does not specifically address the direct relationship between demand and price changes in the context of a TV show's influence on hat sales.

Conclusion

The Law of demand is the most suitable explanation for the price jump of the hat following its exposure on a TV show, as it directly connects increased consumer demand to rising prices. Other options, while relevant in different contexts, do not adequately explain this specific market phenomenon.