Explain how the following factors will affect the demand for a commodity X: (a) a decrease in the price of a implement Y; [5 marks] (b) an increase in consu...

Answer Details

The demand for a good changes when the conditions of demand change. Judge each factor by whether it raises or lowers consumers' ability or willingness to buy commodity X, and whether the related good is a complement or a substitute.

(a) A decrease in the price of an implement Y (a complement used together with X). Because Y is used jointly with X, a fall in the price of Y makes the combined use cheaper, so consumers buy more of Y and therefore more of X. The demand for X rises (the demand curve for X shifts to the right).

(b) An increase in consumers' disposable income. For a normal good, higher disposable income raises purchasing power, so the demand for X increases (rightward shift). (If X were an inferior good, demand would instead fall.)

(c) A decrease in the supply of a substitute P. A fall in the supply of the substitute P pushes up P's price. As P becomes dearer, consumers switch away from P towards X, so the demand for X increases.

(d) An increase in income tax. Higher income tax reduces consumers' disposable income and therefore their purchasing power, so the demand for the normal good X falls (leftward shift).

Note that these are changes in the conditions of demand, so they shift the whole demand curve, unlike a change in the price of X itself, which would cause only a movement along the curve.