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4 What causes price to change?

Chapter Four What causes price to change?

Self-assessment Questions

4.1 True! The only reason for a change in quantity demanded is a change in the price of that

good.

4.2 The ageing population will lead to an increase in the demand for services provided by

the ‘homes for the elderly’.

4.3 The fishing moratorium will lead to a decrease in the supply of marine fish during that

period.

4.4 An increase in price will lower consumers’ quantity demanded, not demand, but it will

increase producers’ quantity supplied, not supply.

4.5 There is no logical relationship between competitive demand and competitive supply.

In other words, goods that are in competitive demand need not be in competitive supply.

4.6 The ‘bird flu’ decreased people’s demand for as well as the supply of chicken. If demand

decreased by a greater extent than that of supply, the price of chicken would fall.

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4 What causes price to change?

S2
S1

P0

P1
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Multiple Choice Questions

1 C 2 A 3 A 4 D 5 D

6 A 7 C 8 C

1 A stronger demand can be taken to mean that people are willing to pay a higher price at

each quantity.

4 Technological breakthroughs will lower the cost of production, and hence the price. The

lower price will help stimulate the quantity demanded.

5 Suppose Good X is gasoline. The fall in the price of gasoline lowers the cost of keeping

a private car. This will lead to an increase in demand for private cars. The resultant

higher prices of private cars will result in a larger quantity supplied.

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4 What causes price to change?

As manufacturers increase their production of private cars, their supply of trucks will

drop. Hence, Good Y is trucks.

Option B is incorrect. If Good X is beef, the decrease in its price will lead to an increase

in its quantity demanded and producers will increase the production of beef. This will in

turn lead to an increase in the supply of hide.

6 When manufacturers started their production in the mainland of China, their cost of

production dropped, resulting in an increase in the supply and hence a drop in the

equilibrium price.

Short Questions

9(a) To E3 event (d)

To E4 events (c) and (d)

To E5 event (c)

To E6 events (b) and (c)

To E7 event (b)

To E8 events (b) and (a)

To E9 event (a)

9(b) John will be correct if rice is a superior or normal good. In this case, the increase in

income will result in an increase in demand, shifting the equilibrium point from E1 to E3.

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4 What causes price to change?

Mary will be correct if rice is an inferior good. In this case, the increase in income will

result in a decrease in demand, shifting the equilibrium point from E1 to E7.

John and Mary can both be correct if rice is a superior or normal good to John but an

inferior good to Mary.

10(a)

140,000
D S
120,000

100,000

80,000
Price

60,000

40,000

S D
20,000

0
0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000
Quantity

10(b)(i) The market is out of equilibrium with a surplus.

10(b)(ii) The quantity transacted is 42,000 cars.

10(b)(iii) The sales value is the product of the price and quantity transacted, and hence it is

$4,200,000,000 (= $100,000 x 42,000)

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4 What causes price to change?

10(b)(iv) With a surplus, producers will lower the price to clear the market. There will be a

tendency for the price to fall back to the equilibrium level.

10(c)(i) The introduction of Korean cars will result in an increase in the supply of small cars

in Hong Kong. The supply curve will shift to the right, leading to a decrease in price

but an increase in quantity transacted.

P
S1

S2
E
P1
F
P2

D1

Q
Q1 Q2

10(c)(ii) After the completion of several major road projects, traffic would be more fluid; and

it would become more convenient to use motor cars. This will lead to an increase in

the demand for private cars. As a result, both price and quantity transacted will

increase.

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4 What causes price to change?

P
S1

F
P2
E
P1

D2

D1
Q
Q1 Q2

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4 What causes price to change?

10(c)(iii) An electronic road pricing scheme raises the cost of using motor cars. This will

result in a decrease in the demand for motor cars. As a result, both price and

quantity transacted will drop.

P
S1

E
P1
F
P2
D1

D2
Q
Q2 Q1

11(a) The slaughter of cattle will reduce the supply of beef in the UK.

11(b) Mad cow disease results in a decrease in the demand for beef as well. If the fall in

demand exceeds that of supply, the price of beef would drop.

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4 What causes price to change?

P
S2

S1

P1

P2
D1

D2
Q

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4 What causes price to change?

11(c)(i) Mad cow disease will result in a decrease in the demand for beef. As people turn to

mutton as a substitute, their demand for lamb will increase, shifting the demand

curve to the right. As a result, the price and quantity of lamb will both increase.

P
S1

F
P2
E
P1

D2

D1
Q
Q1 Q2

11(c)(ii) The slaughter of cows means that there will be a weaker demand for cattle feed,

shifting the demand curve to the left. As a result, the price and quantity transacted

of cattle feed will both drop.

P
S1

E
P1
F
P2
D1
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D2
Q
Q2 Q1
4 What causes price to change?

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