[4] The demand for a product refers to the quantities of the product that potential buyers are willing and able to buy.

Transcription

1 2.1 Which one of the following statements regarding the demand for a good or service is correct? [4] The demand for a product refers to the quantities of the product that potential buyers are willing and able to buy. Reason: Option 4 is the only statement that correctly explains 'demand". 2.2 In terms of the law of supply [2] a decrease in the price of a good or service decreases the quantity supplied. Reason: The law of supply states that increase in price will result in an increase in quantity supplied and vise versa. See the following for further graphical explanation. Questions 2.3 to 2.9 are based on the following data for ice cream: Use this data to draw the market for ice cream using the following diagram: 2.3 According to the law of demand a decrease in the price of ice cream from R8 to R4 [1] will increase the quantity demanded by 400 since a negative relationship exists between the price and quantity demanded.

2 Reason: When they say negative relationship it means that if one variable (price) goes down (decrease), the other will go up (increase)-negative relationship. Quantity demanded calculation: R4 on the demand curve) minus 300 price R8 on the demand curve) equals 400 increase in quantity demanded. 2.4 If the price is higher than the equilibrium price [3] An excess supply is created on the market which results in downward pressure on the price as supplier are trying to get rid of unsold stock. This process continues until the market equilibrium price of R6 is reached. Reason: At any price above the equilibrium price, an excess supply develops in the market. Most sellers will lower the price until the new equilibrium is reached, in this case it is reached at the price of R Which one of the following events will probably cause a rightward shift of the demand curve for ice cream? [1] An increase in the price of a substitute for ice cream such as an ice drink. Reason: Take the given two examples (ice drink and ice cream). If the price of ice drink (substitute for ice cream) increases, then less ice drink will be demanded, as consumers demand less of it, they SWITCH to consuming MORE ice creams. Thus the demand for ice creams will increase. NB: Please read this reason over and over until you surely understand what it explains. Full explanation of how this shown on a graph can be done on a face to face session. 2.6 It is a very hot summer and the demand for ice cream increases which causes an increase in the equilibrium price to R8. Which of the following events is likely to have taken place on the market? [4] At each price a lower quantity of ice cream was demanded. Reason: Trace your price at R6 where it cuts the demand curve to the corresponding quantity of 500 (at equilibrium), then the question/statement says that the price increased to R8, now trace your NEW price of R8 to its corresponding quantity of 300. The upshot is that quantity demanded decreases by 200-thus a lower quantity of ice cream was demanded. 2.7 What will happen to the equilibrium position if there is a decrease in the price of milk that is used in the production of ice cream? [3] The equilibrium price will decrease and the equilibrium quantity will increase.

3 Reason: logic/methodology: Here is a very important factor included, that is "goods that are used in the production of other goods". This factor is STRICTLY suitable for the supply equation/determents. Another very important clue is the word "PRODUCTION" in the question/statement. So to find the correct answer in Economics, PLEASE DO YOUR LOGIC BEFORE GOING TO THE OPTIONS/SUGGESTIONS. Now let us do the verbal logic, suppliers or sellers are only willing to sell more if the price is high and vise versa. If the price of milk decreases, (REMEMBER THAT MILK IS AN INPUT IN THE PRODUCTION OF ICE CREAM) it will be now cheaper to buy milk from the supplier. Consequently, we can now produce more ice creams because we buy milk at a cheaper/lower price. Now lets put this in Economics language: cheaper price/input costs/cost of production leads to increased supply, the supply curve of ice creams will increase, the new price of ice creams will be lower and the equilibrium quantity will be higher. That is your answer in simple words! Your work is to look for this answer from your options/suggestions given. and that is option (number 3). 2.8 If the equilibrium price for ice cream decreases and the equilibrium quantity increases we conclude that a possible cause of this is that [3] the supply has increased. Reason: Kindly check/study the following graph that explain this scenario. 2.9 At the same time that a decrease in demand for ice cream occurs during the winter time a new supplier enters the market which increases the supply of ice cream. From these events we can predict that

4 [2] the equilibrium price will definitely be lower while the change in equilibrium quantity is uncertain. Reason: The equilibrium price will surely decrease/be lower and the equilibrium quantity will be unchanged/uncertain. See the following graph for detailed explanation Given the demand for a product as Qd = 100-5P and the supply is given as Qs = p. You are told equilibrium is obtained at the point where Qd = Qs. [3] R15 Reason: Read the below mathematical expression.

5 2.11 Given the demand for a product as Qd = 50-8P and the supply is given as Qs = -17,5 + 10P. You are told equilibrium is obtained at the point where Qd = Qs. The equilibrium quantity for the product is [2] 20 Reason: Read the below mathematical expression Study the following diagram and answer the question: For every quantity between zero and 300 [1] consumers pay the price they are prepared to pay. Reason: Think back to the long definition of demand, somewhere in the definition, it says "willing to purchase". This ability to purchase or buy is the ground breaking idea for economic analysis and to answer questions like this one. Consumers are only willing to pay from 0 to 300 because of their state of income (what they afford) Study the following diagram and answer the question: If the price decreases to R3 then

6 [4] the quantity supplied will be less than 300 and the total producer surplus will decrease. Logic: if the price decreases, the quantity supplied will decrease. See on the graph. The total producer surplus will also decrease. See the shaded triangle (the new triangle is smaller than the initial one) If a price of a complement increases then [4] the demand for the related good will decrease. Reason: Logic: Complement goods are goods that are used/consumed or produced JOINTLY. Tea and bread, laptop and modem, cellphone and internet data, pen and paper & hundreds more! Details: If the price of tea increases ( tea is now expensive), you buy less quantities of tea, remember that tea and bread are complements. So buying/using less tea means consuming less bread too. So you will also consume less bread. In this regard, in economics we say: if the price of a complementary good increases, the quantity demanded will decrease in the market for tea (just an example please). As a result, a movement

7 along one curve causes a shift of the related product. There will be a leftward shift of the demand for the related good (bread as an example) If tea and coffee are substitutes, given the change in the coffee market as indicated in the diagram, what will happen on the market for tea? [1] The supply of tea will decrease and the equilibrium price of tea will increase, and the equilibrium quantity will decrease and people will drink less tea. Reason: Logic: Substitutes are goods and services that substitute each other, can be used in the place of the other. If you do not drink tea obviously you will drink coffee. An increase in the supply of coffee means that there will be less supply or production of tea, the supply curve of tea shifts to the left, thus, the price will increase and the quantity will decrease. See modified graph below.

8

9 IT IS NOT EVERYDAY WE ASK Donations: If you found this explanation helpful, please donate any amount of money you have to keep this informative help/extra offline class FREE at all times for all. Please note: There is no minimum donation amount. Donations are made to a Nedbank Business Cheque Account. Nothing bad at all. Just donate any amount you have to thank me and keep this service for FREE for all. R1.00,R2.00,R3.00, R4.00, R10.00, R50.00, R100.00, R Any amount you have. Any I mean even R1.00 will make a difference /luckiepersonal@gmail.com/