Cambridge IGCSE and O Level Economics

Chapter 10: Price changes

Suggested answers to individual and group activities
Group activities
1 The price of agricultural products fluctuates more than the price of manufactured goods because
agricultural products are affected by weather conditions, pests and diseases and because
manufactured goods can be stored. A period of bad weather or the outbreak of a disease could
cause a significant decrease in the supply of, for instance, wheat. Wheat is also perishable. If there
is a bumper crop, it will all have to be sold. A large increase in supply could result in a significant
fall in price. In contrast, producers of shoes do not have to sell all the shoes they produce if they
think it will lead to a fall in price.

Individual activities
1 a Price of
economics
books D1 S
D
P1
P
D1
S D

0 Q1 Q Quantity of
economics books 1

A successful advertising campaign will increase demand.

b Price of
economics
books D S
D1
P
P1
D
D1
S

0 Q1 Q Quantity of
economics books

Fewer students studying economics will result in a decrease in demand.

2 a Price of
D

Ghanaian S
football shirts D1

P
P1

D
S D1

0 Q1 Q Quantity of
Ghanaian
football shirts

A football shirt is a normal good. Demand would decrease, causing a fall in price and a
contraction in supply.

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Cambridge IGCSE and O Level Economics

b Price of
Ghanaian D
S
football shirts S1
P
P1

S D
S1
0 Q Q1 Quantity of
Ghanaian
football shirts

A rise in workers’ productivity would reduce costs of production. This, in turn, would cause
price to fall and demand to extend.

c Price of
Ghanaian D1 S
football shirts D

P1
P

S D1
D
0 Q Q1 Quantity of
Ghanaian
football shirts

If Ghana wins the World Cup, their shirts will become more popular. This will increase their
demand. Higher demand will raise price, which would cause the supply to extend.

d Price of
Ghanaian D 2
S1
football shirts
S
P1
P

S1 D
S
0 Q1 Q Quantity of
Ghanaian
football shirts

A tax placed on a product causes a decrease in supply. This results in a rise in price and a
contraction in demand.

e Price of
D S
Ghanaian
S1
football shirts
P
P1

S
D
S1

0 Q Q1 Quantity of
Ghanaian
football shirts

More efficient machinery will decrease the cost of production, causing an increase in supply.
This, in turn, will cause a fall in price and an extension in demand.

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Cambridge IGCSE and O Level Economics

3 Price of D
chicken S1
D1 S

S1 D
S
D1

0 Q1 Q Quantity of
chicken

The slaughter of chicken will reduce the supply of chicken. Also, the disease is likely to discourage
the consumption of chicken and hence demand will decrease. These changes will cause the
quantity bought and sold to fall. The effect on price will depend on the relative size of the two
shifts. Price may rise, fall or if (as in the diagram) supply and demand decrease by an equal
amount, remain unchanged.

Suggested answers to multiple choice questions and

four-part question
Multiple choice questions
1 B
The diagram shows an increasing demand for coffee. A rise in the price of tea may cause some
people to switch from drinking tea to drinking coffee. A rise in the price of coffee here is the
consequence of demand and not the cause. C and D would be likely to cause a decrease in
demand for coffee. 3
2 C
A reduction in the cost of raw materials would cause an increase in supply.
3 B
An inferior good has an inverse relationship with income. As income rises, demand decreases. As
people get richer, they buy more of high-quality products and less of low-quality products.
4 C
A decrease in supply would raise price and cause demand to contract.

Four-part question
a For example: a successful advertising campaign and an increase in the price of a substitute.
b An increase in wages will increase demand for normal goods. This is because people will have
a greater ability to buy products – their purchasing power has increased. Supply, however, may
decrease. This is because higher wages will increase costs of production, if productivity does not
increase in line with the higher wages.
c The granting of a subsidy is designed to encourage producers to supply more. It is likely to
increase supply. The higher supply will lower price and the lower price will cause demand to
extend as shown on the diagram below.

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Cambridge IGCSE and O Level Economics

Price S
D
S1

P
P1

S1 D

0 Q Q1 Quantity

d The price of air travel may increase in the future. Population increases will increase the number
of potential passengers. Air travel is used by business passengers and by tourists. An increase in
income would be likely to be accompanied by an increase in business activity and so there would
be more business passengers. Air travel is a complement to foreign holidays, which are a normal
good. As people get richer, they are likely to take more foreign holidays and to travel further.
Airlines may also decide to spend more on advertising, which may stimulate higher demand.
Other forms of transport are a substitute for air travel and so demand for air travel will be
affected by changes in the price and quality of these forms of transport. For example, if train
travel rises in price, some people may switch to air travel for some journeys. A fall in the quality of
sea travel may also encourage an increase in demand for air travel.
As well as increases in demand pushing up price, a decrease in supply may result in a higher
price of air travel. For instance, the cost of fuel may increase, which would reduce supply and
raise price.
There are, however, reasons for thinking that the price of air travel may fall in the future. Some 4
governments subsidise their countries’ airlines and they may increase the subsidies they give. Air
travel is a very safe method of transport but a major crash may discourage some people from
flying. A significant reason why the price may fall is advances in technology. Planes are becoming
more fuel-efficient and there are a number of larger planes being developed. In recent years, the
relative price of air travel has fallen.

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