Chapter 04 What Causes Price To Change

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.
New Introductory Economics 3rd Edition 6 © Pearson Education Asia Limited 2003
Suggested Solutions
S2
S1
P0
P1
D1
D2
Q
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.
Suggested Solutions
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.
Suggested Solutions
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)
Suggested Solutions
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.
Suggested Solutions
P
S1
F
P2
E
P1
D2
D1
Q
Q1 Q2
Suggested Solutions
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.
Suggested Solutions
P
S2
S1
P1
P2
D1
D2
Q
Suggested Solutions
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
Suggested Solutions
D2
Q
Q2 Q1
Suggested Solutions

Chapter 04 What Causes Price To Change

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4 What causes price to change?

Chapter Four What causes price to change?

the ‘homes for the elderly’.

increase producers’ quantity supplied, not supply.

Multiple Choice Questions

lower price will help stimulate the quantity demanded.

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

drop. Hence, Good Y is trucks.

turn lead to an increase in the supply of hide.

9(a) To E3 event (d)

To E4 events (c) and (d)

To E6 events (b) and (c)

To E8 events (b) and (a)

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

inferior good to Mary.

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

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

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

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

but an increase in quantity transacted.

quantity transacted will drop.

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

of cattle feed will both drop.

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