Download Economics: Questions for chapter 2, page 52 #1

Economics: Questions for chapter 2, page 52 #1-4
1. Explain the difference between a movement along the demand curve and a shift in the
demand curve.
A movement along the demand curve is caused by a change in price. The quantity demanded
changes because the price changes. Other things being equal more will be demanded at lower
prices than at higher prices.
Graph showing a movement along the demand curve
For example, as shown on the graph above, at P the quantity demanded will be Q. If the price
rises to P1 the quantity demanded will fall to Q1. The opposite is also true. If the price falls, the
quantity demanded will rise. There is usually an inverse relationship between price and quantity
demanded. Usually at a higher price less will be demanded. Giffen goods and Veblen goods are
exceptions to this of course.
A shift in the demand curve is caused by a change in one or more of the determinants of
demand. There is a change in demand. There is a greater quantity demanded at every price
if the curve shifts right and a lesser quantity demanded at every price if the curve shifts left.
Determinants of demand include such things as income level, tastes, prices of complements,
etc.
Graph showing a shift of the demand curve
For example, as shown on the graph above, if one of the determinants of demand changes-let’s
say income increases - then the demand curve will shift right as is shown above from D to D1.
At price P on D the quantity demanded is Q. At the same price on D1 the quantity demanded is
Q1. More is being demanded at every price when the demand curve shifts right. Determinants
of demand can shift a demand curve right as is shown above and this shows an increase in
demand with more demanded at every price. Determinants of demand can also shift a curve left
and this shows a decrease in demand with less quantity demanded at every price.
2. Using an appropriate diagram and your knowledge of the determinants of demand explain
why the demand for meat might increase.
Graph showing the increase in the demand for meat
If the demand for meat increases the demand curve will shift right as is shown. More meat will
be demanded at every price. This may be caused by the following determinants of demand:
a. Income may have risen. As income rises more people will buy meat. It is a necessity but
some can’t afford it and eat cheaper things like tofu. If income rises though they may start
demanding it.
b. A change in income distribution-If the poor become better off and the rich a little less well off
then the demand for meat will increase. It is a basic necessity but the very poor will not be able
to afford it unless there is a redistribution of income.
c. People’s tastes may change. For example maybe advertising starts promoting meat as a very
important health benefit. The demand may then increase.
d. The population of a country could suddenly increase with many immigrants arriving and the
demand for meat may surge.
e. Substitute goods for protein like beans could be experiencing a shortage or a price increase
leading people to buy more meat for protein.
f. Expectations of future prices could cause an increase in demand now. For example, if we
expect meat prices to rise a lot in the near future we will increase our demand now and freeze
the meat.
g. Seasonal changes could cause an increase in the demand. For example in summer it is BBQ
season so more meat may be demanded.
h. Government policy could also cause an increase in demand. For example if the government
kindly cut taxes and people have more real income the demand for meat may increase.
3. Explain the difference between a movement along the supply curve and a shift in the supply
curve.
A movement along the supply curve is caused by a change in price. The quantity supplied
changes because the price changes. All other things being equal as the price of a good rises
the quantity supplied rises.
Graph showing a movement along the supply curve
For example at P the quantity supplied is Q. .If the price rises to P1 the quantity supplied will rise
to Q1. If the price falls the quantity supplied will fall. There is a positive relationship between
price and quantity supplied with the increase in price leading to an increase in quantity supplied.
A shift of the supply curve is caused by a change in the determinants of supply. There is a
change in supply. Determinants of supply include such things as costs of production, number
of sellers in the market, taxes, subsidies, etc. With a shift in the supply curve to the right there
is a greater quantity supplied at every price. With a shift of the supply curve to the left there is a
decrease in the quantity supplied at every price.
Graph showing a shift iof the supply curve
For example, if one of the determinants of supply-let’s say the number of sellers in the market
increases-then the supply curve will shift from S to S1. The quantity supplied at P shifts from Q
to Q1. More is being supplied at the same price. More is supplied at every price. Of course the
supply curve can also shift left if, for example, a tax is imposed on a good. This will mean less
will be supplied at every price.
4. Using an appropriate diagram and your knowledge of the determinants of supply explain why
the supply of rice might decrease.
The supply of rice will decrease if one or more of the determinants of supply cause the supply
curve to shift left. This would mean less rice is supplied at every price.
Graph showing a decrease in the supply of rice
The determinants of supply that could cause this are:
a. A tax could be put on the rice by the government or a subsidy removed making the rice more
expensive to produce so the supply curve will shift left and less will be supplied at every price.
b. Factors of production like land or labor could get more expensive making the production of
rice expensive so producers will produce less and there is less supply.
c. It might be more profitable to produce a good like corn so producers will switch factors of
production to corn causing the supply of rice to fall.
d. The number of sellers in the market might decrease causing the supply to fall.
e. Expectations of the future might cause the supply to decrease. For example, if rice producers
expect more and more people to eat bread in the future less rice will be produced and the
supply will fall.
f. A supply shock such as an earthquake, tsunami, typhoon, hurricane, flood, etc could cause
a vast decrease in the supply of rice. These things could also wipe out technology causing a
backslide in technology and productivity to decrease. Bad weather could also cause a decrease
in the supply as could a disease that kills the rice or prevents its growth. War is another factor
that could cause a decrease in supply.