Question

What effect, if any, will each of the following have upon the location of the demand curve for resource J that is being used in the production of commodity X? If there is uncertainty as to the precise effect, explain the sources of that uncertainty

. a. A decline in the demand for product X.

b. An increase in the price of Y, a substitute product for X.

c. A decline in the price of substitute resource K

. d. An increase in the price of complementary resource L.

Answer 1

Demand curve is always downward sloping , implying that there is negative relationship between price and quantity demanded of a commodity. In the above cases;

a), if there is decline in the demand for the product X which is produced using resource J, its equilibrium price will decrease if supply is unchanged. But when demand lowers and so the market price , supply will decline and so the demand for the particular resouce (j). All these are assumed at elaticity to be unit. Thus demand curve for resource J will shift downward.

b). An increase in price of Y , which is a substitute product for x, keeping all other variables constant,( including the price of X), demand for commodity X will raise. This leads to increase in supply of X and so increase in damand for resourse j keeping all other variables as same. When there is increase in demand for resouse j asuming no change in other variables its demand curve will shift upward leading to shift in equilibrium market point for resouce j.

c). When there is decline in the price of substitute resource k, demand for that substitute resouce will raise resulting in decline in demnand for main resource I.e "J". Thus , when all variables affecting demand for a commodity /resouce is constant and there in decline in demand due to decrease in price of substitute , its demand curve will shift downward.

d) When there is an increase in price of complementary resource L, demand for both complementary resource L and resource J will decline. When there is decline in demand for resouce J due increase in price of complementary resource, keeping all other variable contant its demand curve will shift downward.