Chapter 4: What Causes Price to Change?

Question 1

What causes ‘quantity demanded’ to change?

Answer 1

A change in quantity demanded is caused by a change in its own price.

• It is represented by a movement along the same demand curve.

Question 2

What causes ‘demand’ to change?

Answer 2

A change in demand is caused by a change in factors other than its own price.

• It is represented by a shift of the whole curve, i.e.
  Demand ↑ (shifts right) / ↓ (shifts left) when all the quantities demanded at all prices are rising / falling.

Question 3

What are the effects of an increase in demand?

Answer 3

When demand increases, the demand curve shifts right.

• Equilibrium price ↑ from P1 to P2.
• Quantity transacted ↑ from Q1 to Q2.
• Total revenue ↑ from area P1’A’Q1’0 to area P2’B’Q2’0

Question 4

What are the effects of a decrease in demand?

Answer 4

When demand decreases, the demand curve shifts left.

• Equilibrium price ↓ from P1 to P2.
• Quantity transacted ↓ from Q1 to Q2.
• Total revenue ↓ from area P1’A’Q1’0 to area P2’B’Q2’0

Question 5

What are some special factors affecting demand?

Answer 5

1. Substitutes (Competitve demand)

• If two goods are substitutes for each other, an ↑ in consumption of one good will lead to a ↓ in demand for the other good, and vice versa.

Examples:

• Price of Pepsi ↓ - Quantity demanded of Pepsi ↑ - Demand for Coca Cola ↓

2. Complements (Joint demand)

• If two goods are complements of each other, an ↑ in consumption of one good will lead to an ↑ in demand for the other good, and vice versa.

Examples:

• Price of iPad ↓ - Quantity demanded of iPad ↑ - Demand for Apple Pencil ↑

3. Derived demand

• When more of the output has to be produced, it will ↑ the demand of its factors of production.

Examples:

• Demand for lemon tea ↑ - Demand for lemon ↑

4. Income

• For a superior good, demand for it will ↑ when income ↑ - positively related.
• For an inferior good, demand for it will ↓ when income ↑ - negatively related.

5. Consumers’ expectations of future price

• When consumers expect the price of a good will rise soon, the demand ↑ now.
• When consumers expect the price of a good will drop soon, the demand ↓ now.

Question 6

What is ‘derived demand’?

Answer 6

Derived demand refers to the demand for factors of production.

Question 7

What is the difference between ‘derived demand’ and ‘joint demand’?

Answer 7

Joint demand:

• Two goods are complements (used together by consumers)

Derived demand:

• Good X is an input of Good Y

Question 8

What causes ‘quantity supplied’ to change?

Answer 8

A change in quantity supplied is caused by a change in its own price.

• It is represented by a movement along the same supply curve.

Question 9

What causes ‘supply’ to change?

Answer 9

A change in supply is caused by a change in factors other than its own price.

• It is represented by a shift of the whole curve, i.e.
  Supply ↑ (shifts right) / ↓ (shifts left) when all the quantities supplied at all prices are rising / falling.

Question 10

What are the effects of an increase in supply?

Answer 10

When supply increases, the supply curve shifts right.

• Equilibrium price ↓ from P1 to P2.
• Quantity transacted ↑ from Q1 to Q2.
• Total revenue is uncertain.

Question 11

What are the effects of a decrease in supply?

Answer 11

When supply decreases, the supply curve shifts left.

• Equilibrium price ↑ from P1 to P2.
• Quantity transacted ↓ from Q1 to Q2.
• Total revenue is uncertain.

Question 12

What are some special factors affecting supply?

Answer 12

1. Competitive supply

• If two goods are in competitive supply, an ↑ in production of one good will lead to a ↓ in production of the other good, and vice versa.

Examples:

• Supply of sportswear ↑ - Supply of casual wear ↓

2. Joint supply

• If one good is a by-product of another good, an ↑ in supply of one good will lead to an ↑ in supply of the other good.

Examples:

• Supply of chicken fillets ↑ - Supply of chicken wings ↑

3. Cost of production (factor prices)

• When cost of production ↑/↓, supply of the good ↓/↑.

Examples:

• Wages of construction workers ↓ - Supply of housing ↑

4. Sellers’ expectations of future price

• When sellers expect the price of a good will rise soon,
  the present supply ↓.
• When sellers expect the price of a good will drop soon,
  the present supply ↑.

5. Number of producers/sellers

• When more sellers join the market, the market supply ↑.
• When some sellers quit the market, the market supply ↓.

6. State of technology

• When there is an improvement in technology, supply of the good ↑.

Question 13

How will the equilibrium price and quantity transacted change when both demand (P↑, Q↑) and supply (P↓, Q↑) increase?

Answer 13

1. When the increase in demand > the increase in supply,

• The equilibrium price ↑ and the quantity transacted ↑.

2. When the increase in supply > the increase in demand,

• The equilibrium price ↓ and the quantity transacted ↑.

3. When the increase in demand = the increase in supply,

• The equilibrium price remains unchanged and the quantity transacted ↑.