Marking Key

Solution 1
a) Equilibrium is a point where demand is equal to supply. It is a point where the quantity demanded is
the same as the quantity supplied.

b) (i) At equilibrium Qd = Qs, that is, 20 000 – 90P = 10 000 + 110P then solving for P and substituting the
value for P to find Q.

20 000 – 90P = 10 000 + 110P

20 000 -10 000 = 110P + 90P

10 000 = 200P P

= K50

Using Qs = 10 000 + 110P, we have Qs = 10 000 + (110 x 50) = 15 500 units

(ii) A price ceiling of K40 per unit levied by the government affects the quantity demanded. Qd = 20 000
– (90 x 40) = 16 400, Qs = 10 000 + (110 x 40) = 14 400. There is a shortage in the market of 2000 units of
the product. The policy reduces the number of people who buy the product, since supply is lower
because of lower price.

c) The following are the factors that affect demand for a good (X):

 The price of a good (X). The higher the price, the lower the quantity demanded and the reverse is true,
if the price of a good drops, the demand for it would increase.

 Price of substitute products. When the price of substitutes, such as Y and Z, were to reduce or
increase, the demand for X would decrease or increase respectively.

 Consumer’s income. When consumer’s income increase, the demand for X would increase and vice
versa, assuming X is a normal good.

 Consumer’s tastes and preferences. When particular goods are preferred by consumers, their demand
tends to go up.

 Expected future prices. If prices are expected to go up in the future, the demand for goods will go up
now, to avoid high prices in the future. The opposite is also true.

d) A change in demand is either an increase or decrease in demand. It’s either a leftward or rightward
shift of a demand curve. It is caused by changes in any factors affecting demand other than own price.
It’s also called a shift in a demand curve. A change in quantity demanded, on the other hand, is called a
movement along a demand curve. It is caused by a change in own price of the good. There is only one
demand curve.