Solution for Topic 2 Lecture: Demand and Supply

Question 2.1

An increase in the quantity of tea demanded occurs whenever

A)   the population of tea drinkers grows.

B)   the price of coffee (its substitutes) rise.

C)   tea drinkers receive an increase in their incomes.

D)   the price of lemons (its complement) falls.

E)   the price of the tea falls.

Solution 2.1

The correct answer is (E).

The quantity of tea demanded will change only when the price of tea change.

From the law of demand, quantity of tea demanded increases when price of tea falls.

Question 2.2

Which of the following would result in a decrease in the supply of computers?

A)   An increase in the wage of workers in the computer industry.

B)   An improvement in the technology of producing computers.

C)   An increase in consumers’ preference in internet surfing.

D)   An increase in consumers' incomes.

E)   An increase in the number of producer of computers.

Solution 2.2

The correct answer is (A)

When firms need to pay a higher wage to workers, they will employ less workers, produce less output

The supply of the product will decrease.

Question 2.3

Which of the following will NOT cause a shift in the demand curve for rice?

A)   Consumers have a stronger preference in consuming rice.

B)   A decrease in the price of vegetables (a complement to rice).

C)   An increase in the price of rice.

D)   A decrease in the price of noodle (a substitute to rice).

E)   An increase in consumers' incomes

Solution 2.3

The correct answer is (D).

If there is no shift in the demand curve, it implies that there will be a movement along the demand curve.

The price of the product must have either increase or decrease

Only non price factors can cause the demand curve to shift

Question 2.4

What happens to the demand curve of bread when:

(1) The consumers’ income increases?

(2) There is a decrease in the price of biscuits, its main substitutes?

(3) The price of flour (the raw materials in making bread) increases?

Solution 2.4

(1)  If bread is a normal good, the demand curve shifts right. If it is an inferior good, the demand curve shifts left.

(2) When price of biscuits (its substitutes) decreases, consumers will switch to biscuits, so the demand for bread decreases. The demand curve shifts left.

(3) Price of flour changes will affect the supply curve but not the demand curve

Question 2.5

What happen to the supply curve of car when:

(1) The workers in the car industry successfully demanded a higher wage?

(2) Many producers leave the industry due to poor prospects?

(3) There is an increase in the price of petrol?

Solution 2.5

(1)  With higher wage, cost of production increases.  The firms will employ less workers and produce less cars.  Supply decreases, supply curve shifts left.

(2) When number of producers decrease, supply decreases, supply curve shifts left.

(3) Car and petrol are complements in consumption.  When petrol price increases, fewer consumers will buy cars, demand decreases and demand curve will shift.  But supply curve of car is not affected. 

Question 2.6

Evaluate whether the following statement is true or false, justify your answer.

(i)        An increase in price results in increase in supply but not an increase in the quantity supplied.

(ii)       An improvement in technology will shift the good’s supply curve rightward.

Solution 2.6

(i)  False. An increase in price results in increase in the quantity supplied but not an increase in supply.

(ii) True.