Causes of changes in supply and demand

Section A- Multiple Choice Questions

When the price of gas rises by 25%, the quantity purchased falls by 10%. This means that the demand for gas is (a). Inelastic to price changes

(b). Perfectly inelastic to price changes

(c). Elastic to price changes

(d). Perfectly elastic to price changes

The demand for a good is inelastic if:

(a). when the price rises, quantity demand rises

(b) when the price rises, total revenue falls

(c) When the price rises, total revenue rises

(d) when the price rises quantity demanded falls.

Ceteris paribus, a decrease in the demand for furniture will lead to:

Increased price and decreased quantity supplied

Decreased price and decreased quantity supplied

Decreased price and no change in quantity supplied

Increased price and no change in quantity supplied

If the Petroleum Cartel (OPEC) is expected to cut production of crude, what will become of the market equilibrium for crude?

Prices will fall, quantities will increased

Prices will increased, quantities will increased

Prices and quantities will remain the same

Prices will increase, quantities will decrease

During Easter, many consumers buy fish instead of chicken. This means that the demand for fish:

Becomes elastic

Remains unchanged

Shifts to the left

Shifts to the right

The price elasticity of demand measures the responsiveness of quantity demanded for good X to:

Quantity demanded for good Y

A change in the price of good X

Quantity supplied

A change in the output of good X

Which of the following will cause an expansion in the supply of chicken?

A fall in the price of beef

A rise in the price of chicken

A rise in vegetarianism

A rise in the price of chicken feed

Which of the following would cause a shift of the supply curve for mangoes to the left?

A rise in the price of apples

A successful advertising campaign for cream

A reduction in the EU subsidies to fruit growers

An increase in the total numbers of consumers of mangoes

The demand curve for a normal good shifts to the left when:

The price of the good itself rises

The price of complements rises

The price of substitutes rises

An indirect tax is imposed on the good

Which of the following is not held constant when a demand curve is drawn?

The price of the good itself

Households’ real income

The price of competing goods

The price of complementary goods

Section B

Given the supply and demand function:

QD = 100 – 20p

QS = 10 + 40p

Price (P)

Quantity Demanded (QD)

Quantity Supplied (QS)

$.50

$1.00

$1.50

$2.00

$2.50

Use the information in the above table to:

Calculate the equilibrium price. (3 marks)

Calculate the equilibrium quantity demanded and quantity supplied and present the information graphically. (6 marks)

With the aid of a diagram, explain the difference between a shift in the supply and a movement along the supply curve. (6 marks)

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Explain four (4) factors that cause the demand curve to shift for a coral phone. (6 marks)

Shift in Supply vs. Movement along the Supply Curve.

If one of the determinant of price changes it causes the supply curve to shift but if none of the determinants other than price changes causes a movement along the supply curve.

These other determinants are:

Cost of production

Profitability of related products

Profitability of goods in joint supply

Nature and other unpredictable events

Expectations future price changes.

The difference between a movement along the supply curve and a shift of the supply curve is usually distinguished between a change in supply and a change in quantity supplied.

If the other determinants of supply causes supply to rise the supply curve will shift to the right. The new curve (S1) shows that each price more Oxford pencils will be supplied.

If the other determinants cause supply to fall, the supply curve will shift to the left. The new curve (S2) shows that at each price less Oxford pencils will be supplied.

Factors that Cause the demand Curve to shift for a coral phone.

Four (4) factors that cause the demand curve to shift for a coral phone are:

Income available to the household

Income is the payment or the sum of all the wages, salaries, profits, interest payments, rents received and all other forms of earning in a given period of time.

Prices of other goods and services available.

The price of one good can affect the price of others. These are goods that substitute or complement one another. The substitute goods are used as a replacement for others. When the price of one good increases, the demand for the other good goes up.

The complementary goods are the goods that accompany each other or ‘go together’ such as Eggs and bacon, ackee and saltfish. When the price of one good increases, the demand for the other goes down and vice versa.

The households taste and preferences.

The tastes and preference of the household can influence their demand for certain gods, so they can choose what to buy and how much to buy.

The Household’s expectations about future income, wealth and prices.

The household will make choices to consumer certain goods based on their expectations about their expected position in the future and the future changes in prices.