Question

2. What are the determinants of demand? What happens to the demand curve when any of these determinants change? Distinguish between a change in demand and a movement along a fixed demand curve, noting the cause(s) of each. LO3.2

3. Explain the law of supply. Why does the supply curve slope upward? How is the market supply curve derived from the supply curves of individual producers? LO3.3

4. What are the determinants of supply? What happens to the supply curve when any of these determinants change? Distinguish between a change in supply and a change in the quantity supplied, noting the cause(s) of each. LO3.3

5. In 2001 an outbreak of hoof-and-mouth disease in Europe led to the burning of millions of cattle carcasses. What impact do you think this had on the supply of cattle hides, hide prices, the supply of leather goods, and the price of leather goods? LO3.5

6. For each stock in the stock market, the number of shares sold daily equals the number of shares purchased. That is, the quantity of each firm’s shares demanded equals the quantity supplied. So, if this equality always occurs, why do the prices of stock shares ever change? LO3.5

Answer 1

2. The determinants of demand are -

1. Price of the good - This is the primary determinant. If price is higher less is the quantity demanded and if price is low, more is the quantity demanded.
2. Tastes and preferences - When preferences for a good is more, then demand for that good is higher. If preferences shift negatively, demand for the good falls as well. e.g people's preferences for music has shifted from traditional music CDs to online music stores. This decreases demand for music CDs and increases demand for online music.
3. Incomes of consumers - When consumers earn more income (real income), it means that they have higher purchasing power. This implies that more is demanded for a good at a given price when consumer incomes increases.
4. Price of related goods - There are two types of related goods: complementary (that is consumer along with a good) and substitute (consumed instead of a good). When price of complementary good (say Y) increases, the demand for good X decreases. As Py increases, less of Y is demanded and so demand for X decreases as well. While when price of substitute (say Z) increases, the demand for good X increases. When Pz rises, demand for Z falls and more of X is demanded.
5. Number of buyers - If there are more buyers in the market, the market demand for a good will increase.
6. Future price expectations - If consumers expect future prices of a good to change, it changes their current demand for the good. For e.g if future prices are expected to rise, consumers buy more of that good and current demand increases.

Effect on demand curve -

1. A change in own price of good does not cause any shift in the demand curve.
2. When tastes and preference shift positively towards a good, the demand increases for the good and demand curve shifts rightwards and vice versa.
3. When income of consumers increase, demand curve shifts right and when income decreases, demand curveshifts left.
4. When price of complementary good increases, demand curve for good shifts leftwards (and vice versa). When price of substitute good increases, demand curve for good shifts rightwards.
5. When number of buyers increase, demand curve shift rightwards (and vice versa).
6. When future price is expected to fall, current demand decreases and demand curve shifts leftwards (and vice versa).

A change in demand occurs when any factor other than own price changes while movement along a fixed demand curve occur when own price changes. Hence all the determinants (except own price) mentioned above will cause a change in demand. While a change in own price causes movement along the demand curve i.e quantity demanded changes. When price increases, less quantity is demanded along the demand curve.