Chapter 2
Answers to Pause for Thought questions
p41Ø Assume that there are 200 consumers in the market. Of these, 100 have schedules like Tracey’s and 100 have schedules like Darren’s. what would be the total market demand schedule for potatoes now?
4 / 4400
8 / 2600
12 / 1400
16 / 800
20 / 600
p43Ø Do all these six determinants of demand affect both an individual’s demand and the market demand for a product?
All except the distribution of income. The (national) distribution of income simply affects an individual’s income and thus is not a separate determinant from income.
p44Ø 1. Assume that in Table 2.1 the total market demand for potatoes increases by 20% at each price – due, say, to substantial increases in the prices of bread and rice. Plot the old and the new demand curves for potatoes. Is the new curve parallel to the old one?
See Diagram 2.2 opposite. As you can see, the curves are not parallel. A constant percentage increase in quantity demanded gives a bigger and bigger absolute increase as quantity increases.
p44Ø The price of pork rises and yet it is observed that the sales of pork increase. Does this mean that the demand curve for port is sloping upward? Explain.
No, not necessarily. For example the price of substitutes such as beef, chicken or lamb may have risen by a larger amount. In such cases the demand curve for pork will have shifted to the right. Thus although a rise in the price of pork will cause a movement up along this new demand curve, more pork will nevertheless be demanded because pork is now relatively cheaper than the alternatives.
p49Ø 1. For what reasons might the supply of potatoes fall?
Examples include:
q The cost of producing potatoes rises
q The profitability of alternative crops (e.g. carrots) rises.
q A poor potato harvest
q Farmers expect the price of potatoes to rise (shortrun supply falls).
p49Ø 2. For what reasons might the supply of leather rise?
Examples include:
q The costs of producing leather fall.
q The profitability of producing alternative products decreases.
q The price of beef rises.
q A longrunning industrial dispute involving leather workers is resolved.
q Producers expect the price of leather to fall (shortrun supply increases).
p49Ø This question is concerned with the supply of oil for the generation of electricity. In each case consider whether there is a movement along the supply curve (and in which direction) or a shift in it (and whether left or right).
(a) New oilfields start up in production. (b) The demand for electricity rises. (c) The price of gas falls. (d) Oil companies anticipate an upsurge in demand for oil in electricity generation. (e) The demand for petrol rises. (f) New technology decreases the costs of oil refining.
(a) Shift right.
(b) Movement up along (as a result of a rise in price).
(c) Movement down along (as a result of a fall in price resulting from a fall in demand as suppliers switch to coal fired stations).
(d) Shift left (if companies want to conserve their stocks in anticipation of a price rise).
(e) Shift right (more of a good in joint supply is produced).
(f) Shift right.
p52Ø Explain the process by which the price of houses would rise if there were a shortage.
People with houses to sell would ask a higher price than previous sellers of similar houses (probably with the advice of a real estate agent). Potential purchasers would be prepared to pay a higher price than previously in order to obtain the type of house they wanted.
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