- What is the difference between a “change in demand” and a change in “quantity demanded.” 20 Points
A change in demand increases or decreases in a good’s demand due to the change in various demand determinants. A shift in the demand curve measures a change in demand. The shift in the entire demand curve is due to a change in customer preferences, substitutes and complements population, expectations, and incomes. A shift in the demand curve only occurs when the price is constant. Thus, an increase in demand is simply a rise in a product’s demand at a given price. A good example of a change in demand is analyzing the purchase of essential products. For instance, the quantity of salt demanded would remain constant or equal, despite price changes. Therefore, a reduction or increase in the price of salt would not affect its consumption.
A change in quantity demanded is affected by the price of a product. Thus, a change in quantity demanded is a change in quantities purchased due to the increase or decrease in price. The change in quantity demanded is measured using the movement along the supply curve. It is critical to note that a change in quantity demanded only occurs when other factors other than price are kept constant. For instance, an increase in bread price would lead to less demand for bread, hence increasing quantities demanded. Further, a decrease in bread’s price would lead to more demand, leading to a downwards movement in the demand curve.
- What is the difference between a “change in supply” and a change in “quantity supplied.” 20 Points
A change in supply occurs when the conditions that affect supply change. Similar to a change in demand, a change in supply only occurs at a constant price. Conditions that lead to a change of supply include technology, taxes, production costs, subsidies, weather conditions, livestock, or crop health. A shift in the supply curve measures a change in supply. Therefore, the entire supply curve moves left or right, depending on whether supply conditions increase or decrease. An example of a change in supply is favorable weather. When weather conditions are favorable, crop productions increase, hence increasing the amount supplied to consumers.
On the other hand, a change in the quantity supplied is measured by a movement along the supply curve. Price is the only factor that can cause a change in the number of supplies. Thus, as the price for normal goods increases, the quantity a supplier is willing to supply also rises and vice versa. Therefore, unlike the movement along a demand curve, the supply price and quantity are directly proportionate.
- Holding demand constant, what is the only thing that can cause a change in quantity demanded? What are the things that cause a change in demand? 20 Points
Assuming that it is a normal good and holding demand constant, price is the only factor that can change the quantity of products demanded. As stated above, a change in quantity demanded is due to movements along the demand curve due to price. All other factors, except price, cause a change in demand and not quantity demanded.
For instance, if one holds the demand for bread constant at 50 loaves a day, a change in its price from $2.50 to $3.50 would lead to significant demand changes. The price increase would affect the quantity demanded as customers would reduce bread consumption. Such customers would seek less costly substitutes for bread. Thus, only the price can cause changes in quantities demanded.
- How do changes in income affect the demand for a good? 20 Points
In most types of goods, a change in income has direct proportionality to demand. Thus, one’s income dictates the number of goods a person is willing and able to buy. In normal goods, a rise in income leads to higher demand, while a decrease in income reduces demand.
However, the relationship between income and demand is reversed in inferior goods. Inferior goods are those whose demand drops when a person’s income increases. For instance, low earners would buy second-hand clothes as they are within one’s income range. However, an increase in income would lead to a decrease in second-hand purchases and a shift to designer clothing.
- How do substitute and complementary goods affect the demand for a good? 20 Points
While complementary goods are consumed together, substitutes are those that are used in the place of others. Substitutes include coffee and tea, butter and margarine, or cars and buses. When the coffee price reduces, its demand increases, and the demand for its substitute, tea, reduces. On the other hand, an increase in coffee prices would reduce demand and increase the demand for tea.
Complementary goods also cause a shift in the demand curve. Examples of complementary goods are milk and cereals, bread and jam, petrol and cars, and mobile phones and sim cards. The demand for complementary goods is directly proportionate. For instance, an increase in the price of cars would reduce their demand. Furthermore, since petrol is necessary for driving, its demand would also reduce.