Question

1. (a) What are the six major factors that cause demand to change? (b) How do each change demand? (c) Draw a graph to illustrate the change for each factor. (d) How does each shift affect equilibrium price and quantity?

2. What is the relationship between price and quantity supplied?

Answer 1

1. (a) The factors that cause demand to change are: own prices,prices of substitutes, income levels,advertising,seasonality and prices of complementary goods.

(b) A change in own prices will cause a movement along the demand curve as its an endogenous factor. An increase in the price of substitutes will mean that the current good appears more attractive and so there is a rightward shift in the demand curve. As income rises this will mean the demand for the good rises if the good is normal and so the demand curve shifts rightwards. Similarly advertising and seasonality will cause the demand curve to shift rightwards or leftwards as the case maybe as demand rises or falls.

(d) For each of the factors above, a rightward shift in the demand curve will cause an increase in equilibrium price and quantity for a change in income, advertising or price of substitutes as the case maybe.

2. There is a positive relation between price and quantity supplied. As price rises there is an upward movement along the supply curve and a fall in price fall there is a downward movement along the supply curve.