Demand and supply curves (3)
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1.
Question 3
Explain how a change in consumer expectations about future prices could affect the current demand for a product. (12 marks)
Answer:
Introduction: This question explores the impact of expectations on current demand. It requires an understanding of how anticipated future price changes can influence present-day consumption decisions.
Body:
- Positive Expectations: If consumers expect the price of a product to rise in the future, they are likely to increase their current demand. This is because they will want to buy the product now before the price increases. This leads to an increase in current demand.
- Negative Expectations: Conversely, if consumers expect the price of a product to fall in the future, they are likely to decrease their current demand. They will postpone their purchases, hoping to buy the product at a lower price later. This leads to a decrease in current demand.
- Examples:
- Housing Market: If people expect house prices to rise, they may be more inclined to buy a house now, increasing current demand.
- Fuel Prices: If consumers anticipate a rise in fuel prices, they might increase their current fuel consumption (e.g., driving more, taking more trips) to stock up.
- Seasonal Goods: Expectations about future availability (e.g., a shortage of a seasonal fruit) can influence current demand.
- Impact on the Demand Curve: Changes in consumer expectations can cause a shift in the demand curve. Positive expectations about future prices will shift the demand curve to the right, while negative expectations will shift it to the left. This is a temporary shift, as the expectations are not based on current market conditions.
- Limitations: The impact of expectations depends on the credibility of the expectations and the consumers' ability to act on them. If expectations are not widely shared or if consumers lack the means to adjust their behavior, the impact may be limited.
Conclusion: Consumer expectations about future prices can significantly influence current demand. Positive expectations lead to increased current demand, while negative expectations lead to decreased current demand. These expectations can cause temporary shifts in the demand curve.
2.
Question 2: Consider the market for organic fruit. Discuss how changes in consumer tastes and preferences can affect the supply of organic fruit. Explain the implications of these changes for the equilibrium price and quantity in the market.
Consumer tastes and preferences are a crucial determinant of supply, although they don't directly influence the *cost* of production. However, they significantly impact the *willingness* of producers to supply a good.
How changes in consumer tastes affect supply:
- Increased demand for organic fruit: If consumer tastes shift towards organic fruit (e.g., due to increased awareness of health benefits or environmental concerns), producers will be incentivized to increase their supply of organic fruit. This is because they anticipate higher prices and greater profits. This will lead to a rightward shift in the supply curve.
- Decreased demand for organic fruit: Conversely, if consumer tastes shift away from organic fruit (e.g., due to concerns about price or perceived lack of benefit), producers will reduce their supply. This will lead to a leftward shift in the supply curve.
Implications for Equilibrium Price and Quantity:
A rightward shift in the supply curve, combined with the original demand curve, will result in a new equilibrium point.
- Increased demand & Rightward shift: The new equilibrium will typically show a higher equilibrium price and a higher equilibrium quantity. This is because the increased demand, combined with the increased supply, leads to a larger market clearing price and quantity.
- Decreased demand & Leftward shift: The new equilibrium will typically show a lower equilibrium price and a lower equilibrium quantity. The reduced demand, combined with the reduced supply, leads to a smaller market clearing price and quantity.
3.
Question 3: Explain how a change in the price of a complementary good affects the demand curve for a particular product. Use a diagram to illustrate the impact. Discuss the implications of this relationship for businesses.
A complementary good is a good that is typically consumed with another good (e.g., coffee and milk, printers and ink cartridges). A change in the price of a complementary good affects the demand curve for the original product. If the price of a complementary good increases, the demand curve for the original product shifts to the left. This is because the combined effect of the higher price of the complementary good and the reduced consumption of that good leads to lower demand for the original product. Conversely, if the price of a complementary good decreases, the demand curve for the original product shifts to the right.
Diagram: The diagram would show two overlapping demand curves – one for the original product and one for the complementary good. A change in the price of the complementary good would be indicated by a shift in the demand curve for the original product. A rightward shift would be shown with an increase in demand, and a leftward shift with a decrease in demand.
Implications for businesses: Businesses selling the original product need to carefully consider the price changes of their complementary goods. If the price of a complementary good increases, the business may experience a decrease in demand for its product. They might need to adjust their pricing strategy, offer discounts on the original product, or explore alternative marketing strategies to mitigate the impact. Conversely, if the price of a complementary good decreases, the business may benefit from increased demand for its product. Businesses might consider increasing production, expanding their marketing efforts, or developing new products that complement the original product.