(a) Distinguish between competitive demand and joint demand. (b) Using diagrams, explain how the following factors will affect the equilibrium price and qua...

Answer Details

(a) Competitive demand and joint demand.

• Competitive demand exists when two goods are substitutes, so that they satisfy the same want and compete for the consumer's income. A rise in demand for one reduces demand for the other. Example: butter and margarine, or tea and coffee.
• Joint (complementary) demand exists when two goods are used together to satisfy a want, so that they are demanded jointly. A rise in demand for one raises demand for the other. Example: cars and petrol, or bread and butter.

(b) Effects on the equilibrium price and quantity of commodity R.

• (i) A rise in the price of a complement of R. Because the complement is now dearer, less of it is bought, and since R is used together with it, the demand for R falls. The demand curve for R shifts to the left, lowering both the equilibrium price and the equilibrium quantity of R. On the diagram, show demand shifting left from \(D_1\) to \(D_2\) along the supply curve, giving a lower price and lower quantity.
• (ii) A rise in the price of a substitute of R. The substitute is now dearer, so buyers switch to R; the demand for R rises. The demand curve for R shifts to the right from \(D_1\) to \(D_2\), raising both the equilibrium price and the equilibrium quantity of R.
• (iii) Imposition of an indirect tax on R. The tax raises producers' costs, so supply falls; the supply curve shifts to the left (up) from \(S_1\) to \(S_2\). The equilibrium price rises and the equilibrium quantity falls.

Examination takeaway. A change affecting buyers' willingness (price of a related good) shifts the demand curve, while a change affecting producers' costs (a tax) shifts the supply curve; identify which curve moves before reading off the new price and quantity.