Question

Answer the questions about demand/supply based on the market scenarios given below. Indicate determinant that causes demand/supply to change (do not forget to use ceteris paribus principle when examining the relationship between the market price and quantity demanded/supplied).

1. The Postal Service announced that it will be inevitably forced to double the price of the first class postage stamp next month if the government does not provide the necessary financing for its current operations by the end of this month. If the general public really believes that this organization will fail to secure the required government funding, then what is likely to happen to demand for the postage stamps today?
   
   
   
2. All major manufacturers of optical storage media have announced that they will soon unveil new type of disks that uses a revolutionary method of recording data, which allows each disk to store ten times more data than stored on current optical disks. What is likely to happen to supply of optical storage memory when these disks become available on the market?
   
   
   
3. Major electronic department store chains released nationwide TV ads that announce that all makes and models of smartphones will be placed on sale at a 25% discount next week. What is likely to happen to demand, as well as quantity demanded, for these smartphones at the beginning of next week?
   
   
   
4. Computer industry analysts predict that during this year new types of tablet devices will see a significant growth in popularity among all consumers due to much wider variety of features and better day-to-day applications. If the analysts’ prediction is true, what is likely to happen with demand for the tablet devices?
   
   
   
5. Because of unusually hot weather this year, strawberry harvest has been very low during this year. What is likely to happen to demand for whipped cream assuming that the two goods are normally eaten together by all consumers?

Answer 1

(1) Determinant of shift - Consumer Expectations

If consumers expect price of stamps to rise in future, they will buy and demand more stamps today (to buy the stamps at lower current price, instead of buying them in future at higher price). This will increase demand, shifting current demand curve rightward, increasing both price and quantity.

(2) Determinant of shift - Technological improvement

Improved technology will lower production cost, so producers will increase production. Market supply will increase, shifting supply curve rightward, decreasing price and increasing quantity.

(3) Demand curve does not shift

At beginning of next week, quantity demanded will increase due to a fall in price, causing a downward movement along demand curve, lowering price and increasing quantity. But demand will not shift. A change in current price will change quantity demanded, leaving demand unchanged (But in current week, an expected fall in future price will increase current demand).

(4) Determinant of shift - Consumer Tastes and Preferences

Increased popularity toward the good will increase its demand, shifting demand curve rightward, increasing both price and quantity.

(5) Determinant of shift - Change in Price of Related Good

Low harvest of strawberry will decrease its supply, increasing its price. Since whipped cream is a complement, higher price of strawberry will decrease the demand for whipped cream, shifting its demand curve leftward, decreasing both price and quantity of whipped cream.