Question

7. (8 points) Shifts in Demand Give an example of each List three deterninants that would shift a demand curve. determinant. For each determinant, what happens to the demand curve What happens to the demand curve if there is a decrease? equilibrium price and quantity with the shift in the demand curve. Explain what happens to 2. 3 8. (8 points) Shifts in Supply List three determinants that would shift a supply curve. Give an example of each determinant. For each determinant, what happens to the supply curve if there is an increase? What happens to the supply curve if there is a decrease? Explain what happens to equilibrium price and quantity with the shift in the supply curve. 2. 3.

Answer 1

7.

The three determinants of demand are as follows

1. Price of the related good- If the price of substitute good rises, then the demand for concerned good also rises. This is because the concerned good is now relatively cheaper. For example, if price of coffee rises, the demand for tea will will rise as the tea has now become relatively cheaper. The consumers will now shift from coffee to tea. The demand curve for tea will shift to the right. The price however for tea will remain unchanged. It is only the demand which will go up.

If we consider the equilibrium price, then a rightward shift in demand will lead to increase in price and quantity.

2. Tastes and Preferences- If the tastes and preference of the buyer changes in favour of a good, the demand for the good will increase. For example, if the consumers starts preferring health drinks in place of colas and sodas, the demand for health drinks will increase. The demand curve for health drinks will shift to the right. The price will remain unchanged.

If we consider the equilibrium price, then a rightward shift in demand will lead to increase in price and quantity.

3. Income of the buyer- If the income of the buyer goes up he can now afford more of all commodities as there is a rise in his nominal income. The demand curve for any normal good will shift to the right with no change in price.

If we consider the equilibrium price, then a rightward shift in demand will lead to increase in price and quantity.