Quiz 3: Demand, Supply, and the Market Process

Business

a) Higher pork prices will increase the current demand for beef. It is because pork is viewed by consumers as a strong substitute for beef. According to economic analysis, substitute goods are the ones where the increase in the price of one increases the quantity demanded of the others. Moreover, the increase in demand for beef is occurring on account of change in the price of its substitute, that is, pork. When the change in demand is due to changes in other factors other than the price of the good, then increase in demand is said to have occurred. The increase in demand causes the demand curve to shift outward. Hence increase in the price of pork will increase the demand for beef. b) Higher consumer income will cause the current demand for beef to increase because the change in demand for beef is occurring on account of change in other factors, that is, income and not due to the change in the price of beef. Therefore, an increase in the consumer income will cause the demand curve to shift outward and the demand will increase at a given price. c) Increased prices of feed grains used to feed cattle will affect the supply of beef rather than the demand. It is because higher prices of feed grains to feed cattle means an increase in the cost of feeding the cattle which will reduce the supply of cattle relative to the given consumer demand for beef. d) Widespread occurrence of hoof-and- mouth or mad cow disease will affect the supply of beef rather than the demand for beef. The outbreak of the disease affecting cattle will result in the killing of cattle on a large scale which will reduce the supply of cattle relative to the given consumer demand. e) An increase in the price of beef will affect the quantity demand for beef. When the change in demand is due to the price of beef alone, other things remaining constant, then a consumer moves along the demand curve and an increase in quantity demanded is said to have occurred and not increase in demand.

As we know that there is an inverse relationship between price and quantity demanded and other factors are assumed to be constant. The following are the factors assumed to be constant while constructing the demand curve for a specific product. a) Income of consumer b) Taste and preference c) Future expectation d) Number of buyers in the market e) Price of related goods Any change in the above factors causes the demand curve to shift outward or inward, and the movement is not along the demand curve. When the change in demand is due to change in any of the above factors, it is called increase or decrease in demand. The demand curve for a particular product will always slope downwards from left to right because as the price of the good increases, the demand for that particular good starts to decline, and the consumer tries to purchase the substitute good. On the other hand, we can say that if the marginal utility of a particular good is greater than its price, the consumer can increase his welfare by purchasing more units of that particular good. Similarly, if the marginal utility of a particular good is less than its price, the consumer can increase his total satisfaction by cutting down the quantity of that good and will save more of his income. Therefore, it is the existence of the substitute goods and the law of diminishing marginal utility that causes the quantity demanded to increase when price decreases.

The law of supply states that there is always a positive relationship between price and quantity supplied. If the price of a commodity increases, then its supply will also increase. The upward slope of the supply curve can establish the law of supply. a) Gasoline: If the price of gasoline is increased, then producers will increase the supply of gasoline. b) Cheating in exams: more people will come into the market to provide cheating services if the price of cheating in exams increases. Hence, the supply will increase as the price of cheating is increased. c) Political favors from legislators: If the price of political favors from legislator increases, then he/she will increase the supply to earn more and more profit. d) The services of heart specialist: If the price of heart surgery or related services increases, then the supply will also increase, as more specialists will provide their services. e) Children: If the cost of bringing up children increases, then less people would be willing to give birth to babies that will reduce the supply of children. f) Legal divorces: less people will file for divorce if the price of filing for divorce increases, then the supply of divorces will reduce.

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