Question

1. What does a demand curve illustrate? What will cause a demand curve to shift? Provide two examples from the automobile market where the demand for automobiles expands.
2. What are the determinants of supply? Provide three examples from the market for automobiles where the supply of automobiles will contract (shift left).
3. How are the markets for automobiles and gasoline related? What would happen to the market for automobiles if the consumer price of gasoline rose?
4. Explain the term Opportunity Cost. What is the opportunity cost of your decision to enroll in college?
5. Differentiate between Absolute Advantage and Comparative Advantage. Is it necessary for a country to have absolute advantage in the production of a good to have comparative advantage in it? Explain your answer.

Answer 1

1. Demand curve is the graphical representation of the maximum quantities per unit of time that consumers will take at various prices. When demand of a commodity changes due to change in factors other than price than it is known as change in demand and it leads to shift of demand curve either rightward or leftward. Demand curve shifts due to following causes;

(i) Price of related goods: Demand for a commodity is also affected by the change in the price of related goods like substitute goods or complementary goods. Substitute goods are those goods which are used in place of one another. Increase in the price of one good increases the demand of other good and vice-versa. On the other hand, complementary goods are those goods which jointly satisfy a particular want of consumer. An increase in the price of one good decreases the demand of other good. It causes shift of demand curve either rightward or leftwards.

(ii) Income of the consumer: Increase in the income of consumer increases the demand of normal good while reduces the demand of inferior goods. It causes shift of demand curve either rightward or leftwards. Increase in the income shifts the demand curve rightwards and vice-versa.

(iii) Taste and Preference of the consumer: If consumers have favorable taste and preference for the good then demand of that good increases and vice-versa. If consumers have favorable taste and preference for the good then demand curve shifts rightwards and unfavorable taste for the commodity shifts it leftwards.

(iv) Expectation: If people expect that price of a commodity will reduce in near future then people demand less number of goods today and as a result, demand decreases and causes the demand curve to shift leftwards. When people expect that price of a commodity will increase increase in near future than present consumption increases and leads to rightward shift of demand curve.

Increase in the income of consumer increases demand of automobiles and shifts demand curve rightwards.

When consumers expect that price of automobile will increase in future then current demand of automobiles increases which shifts demand curve rightwards.

2. Supply of a commodity refers to a schedule showing various quantities of a commodity that the producers are willing to sell at different possible prices of the commodity at a point of time. Law of supply states that there is a direct relationship between the price of a commodity and its quantity supplied, keeping other factors constant. Therefore, more is supplied at a higher price and vice-versa.

Determinants of Supply:

The Price of commodity: There is a direct relationship between the price of a commodity and its quantity supplied. Higher the price, higher the quantity supplied and lower the price, lower the quantity supplied. It causes movement of supply curve either upward or downward.

Price of related goods: The supply of a good depend on the price of related goods. Example: Consider a firm selling tea. If price of coffee rises in the market, the firm will be willing to sell less tea at an existing price. Or, it will be willing to sell the same quantity only at a higher price. It causes shift of supply curve either rightward or leftwards.

Number of firms: Market supply of a commodity depends upon the number of firms in the market. An increase in the number of firms implies an increase in market supply and vice-versa. It causes shift of supply curve either rightward or leftwards.

Price of factors of production: If the factor price decreases, the cost of production reduces. Due to this more of the commodity is supplied at its existing price. Inversely, increase in factors price increases the cost of production and lead to less supply of commodity. It causes shift of supply curve either rightward or leftwards.

Change in technology: Improvement in the technique of production reduces the cost of production and increases supply and vice-versa. It causes shift of supply curve either rightward or leftwards.

Government policy: Taxation and subsidy policy of the government affects the market supply of the commodity. An increase in taxation tends to reduce supply. On the other hand, subsidies tend to increase in the supply of commodity. It cause shift of supply curve either rightward or leftwards.

When supply of commodity increases due to change in factors other than price of commodity then it leads to rightward shift of supply curve. For example; Improvement in technology, reduction in the price of factors of production, decrease in the price of competing good, increase in the number of firms in the market.

When supply of commodity decreases due to change in factors other than price of commodity then it leads to leftward shift of supply curve. For example; Use of outdated technology, increase in price of factors of production, increase in price of competing good, decrease in the number of firms in the market.

Reason for leftward shift of supply curve are;

1) Increase in the cost of production of automobiles.

2) Decrease in the number of firms producing automobiles

3) Increase in taxes on automobiles