pExamination Tips
HKCEE F 4 Economics
Topic
4: Factors affecting Demand & Supply
In topic 3, the concepts of demand and supply are introduced and
We have shown how
the equilibrium price is determined when putting
these two concepts together. In this chapter, we discuss how demand
and supply changes in both
product market and labour market.
This topic should be studied together with topic 5 and topic 6
in order to tackle the public examination
because many questions
Ask students to
show how the price and total revenue changes
When
market intervention which affects demand and supply exists.
4.1. Change In
Demand***(00)
Demand is the quantity
demanded at every price.
Increase in Demand is
increase in quantity demanded
at every price.
Graphically, demand curve shifts to
the
right.( Figure 1)
Decrease in Demand is
decrease in quantity demanded
at
every price. Graphically, demand curve shifts to
the
left ( Figure 2)
Price($) D1 D2 Price($) D2 D1
D1
D2
D2 D1
0
Quantity 0
Quantity
Figure 1 Increase in demand
Figure 2 Decrease in demand
The reason for change in Demand is because
of
other factors other than the good’s own price,
such
as income.
4.2. Change in Quantity Demanded***(00)
Change in Quantity demanded is due to
change
in the good’s own price, others
things
being equal. Graphically, it is
a
movement along the demand curve.
(Figure 3)
Price($) D
D
0 Quantity
Figure 3 Increase in quantity demand
Remarks about 4.1 & 4.2
(1) Change in Quantity Demanded Vs Change in Demand ( Part 1)
Change in demand is a shift of the demand curve
But
change in quantity demanded is a movement
alone the demand curve. It is their graphic difference.
The reason
for change in demand is the factors
other than the good’s own price. However,
change in quantity demanded is due to
the good’s own price, other things being
equal. It is their another
difference.
(2) Change in Quantity Demanded Vs Change in Demand (
Part 2)
In order to enhance the knowledge of the
difference between the change in
quantity demanded and change in
demand. Let take a look on the below
dialogue and help yourself understand
the difference:
John: When the price of mobile phones
increases, people will buy
fewer mobile phones.
Paul: No. it is not true really. The price of
mobile phones has increased; however,
quantity of mobile phones transacted
has also increased.
Why both of statements is
true?
The
logic is that Mary’s statement refers
to change in quantity demanded due to
increase in mobile phone’s own price.
However, Paul’s statement refers to
Change( increase) in demand due to
other factors ( increase in income),
,
not the change in mobile phone’s
price.
So when there is increase in
demand for mobile phones, quantity
transacted and its price have increased
Examination Tips
on 4.1 & 4.2
1. Examination Record
In HKCE, the difference between change in
quantity demand and demand was examined
2. Student’s Weakness on CE
They failed to recognize the difference between change in
Quantity demanded and demand, that is:
quantity demanded affected by good’s
own price and demand affected by other
factors other than good’s own price.
3. Study guide
Student must understand the difference
between Quantity demanded and demand and
are able to justify why two different situations
which seem contradict each other are correct.
4.3. Factors Affecting Individual Demand*****
(91,
92, 94, 95, 96, 98, 99, 00)
1. Change in the price of related goods*****
Price($) D
Price($) D1 D2
D
D1 D2
0
Q
0 Q
Figure 4 decrease in quantity demand
of
Figure 5 increase in demand for
legal computer software
illegal computer software
(a) Substitutes
Two goods are said to be substitutes or
competitive
demand if either of them can satisfy a
particular
want of a consumer. Legal computer software and
illegal computer software are substitutes.
When the
price of legal computer software
increases, its quantity demanded will
decrease (Figure 4).
Consumers
buy more illegal one to replace
legal one. Demand for illegal one increases and its
Demand
curve will shift to the right (Figure 5).
(b)
Complements
Two goods are said to be complements or
joint demand
if they must be consumed together in order
to satisfy a particular want. Gasoline and
car are complements. If the price of
cars increases, its quantity demanded
will decrease( Figure 6). Demand for gasoline
will decrease and its demand will shift to
the left (Figure 7).
Price($) D
Price($)
D1 D0
D
D1 D0
0
Quantity 0 Quantity
Figure 6 decrease in quantity
demand
Figure 7 decrease in demand for gasoline
In cars
2.
Income****
The effect of
income changes on demand depends
on the nature of good itself:
(a) Superior good
Demand for these goods will increase when
our income increases, e.g. TV sets.
(b)Inferior good
Demand for these goods will decrease when
our income increase, e.g no of children.
3. Taste
Demand increases or decreases according to
whether a change in taste in favour or
against the good. If there is a change in
tastes in favour of a good, demand increases
and demand curve shift to the right.
The reverse is also true.
4. Consumer’s Expectation of future price
When consumer expects the good’s price
increase in the future, he will postpone
their purchase. Demand will decrease
at the present but increase in the future.
The reverse is
also true.
5. Size of population
A large
population leads to more consumers
In
the market. More consumers will results
In increase in
market demand and market
Demand curve
will shift to the right
6.
Derived demand****
Firms require land, labour, raw materials,
and
other factors to produce products
for
sale. Demand for any factor therefore
depends
on the existence of a demand
for the products that it helps
to produce.
We say that the demand for a factor is
a
derived demand.
For example, a new
airport was built in Chek Lap
Kok in
demand
for workers who helped to build airport
and
demand for private housing In Areas near airport.
4.4. Effects of a change in Demand*
1. Increase in Demand
Price($) D D1 s
P1
P0
s
0
Q0 Q1
Quantity
Figure 8 Effects of an Increase in demand
Increase in Demand means shift in demand
to the right from D0 to D1( figure 8) and
leads to two effects:
(a) increase in equilibrium price from
P0 to P1( Figure 8);.
(b) increase in quantity transacted from
Q0 to Q1( Figure 8), other things
being equal.
2. Decrease in Demand
Price($) D1 D0 s
P0
P1
s
0
Q1 Q0
Quantity
Figure 9 Effects of an decrease in demand
Decrease in Demand means shift in demand
to the left from D0 to D1( figure 9) and
lead to two effects:
(a)decrease in equilibrium price from
P0 to P1( Figure 9) ;.
(b) decrease in quantity transacted from
Q0 to Q1( Figure 9), other things being equal.
Examination Tips on 4.3 & 4.4
1. Examination Records
(a)
Students
were examined how demand of a good
Changed when the price of its substitutes
changed.
(b) Students were asked how demand for a factor
changed
When demand for a products
that it helped to produce
Changed.
2. Student Weakness in CE
(a)
Students
were able to point out how demand of a good
Changed when the price of its substitutes
changed.
.
(b) Students were capable of showing the
effects of
Changes in demand for good on demand for
Factor (worker) it help to produce but did not
Keep the wage rate constant
because the situation
Described in the question
says the wage rate
Was fixed.
(C) Some
students misunderstood that the question
was
dealing with the product market instead of
labour market.
(3) Study guide
(a) Bear in mind that change in price of
related goods,
Income and derived demand are the most important
Factors affecting demand. The emphasis should
Placed on these concepts.
(b) Students have a problem of applying the
concept of
derived demand in real cases. To apply the concept
correctly to the real cases, you should understand the
logic that Demand for a factor is dependent of the
existence of demand for a good it helps to produce.
Change in demand for a good leads to change
in
Demand for a factor.
4.5. Change in Supply*
S0
S1
Price($)
S1 Price($) S0
0
Quantity
0
Quantity
Figure 10 increase in supply
Figure 11 decrease in supply
Supply is the quantity
supplied at every price.
Increase in supply is
increase in quantity supplied
at
every price. Graphically, supply curve shifts to
the
right.( Figure 10)
Decrease in supply is
decrease in quantity supplied
at
every price. Graphically, supply curve shifts to
the
left ( Figure 11)
4.6. Change in Quantity Supplied*
Change in Quantity Supplied is due to
change
in the good’s own price, others
things
being equal. Graphically, it is
a
movement along the supply curve.
(Figure
12)
Price($)
S
S
0 Quantity
Figure 12 increase
in quantity supplied
Remarks:
Change in Quantity Supplied Vs Change in Supply**
Change in supply is a shift of the supply curve
But change in quantity
supplied is a movement
alone
the supply curve. It is their graphic
difference.
The reason for change in supply
is the factors
other than the good’s own price. However,
change
in quantity supplied is due to
the
good’s own price, other things being
equal.
It is their another difference.
4.7.
Factors affecting Supply*****
(91, 92, 93, 94, 95, 96, 97, 98,
99)
Price($)
S
Price ($)
S1
S2
0
Quantity 0
Quantity
Figure 13 increase in quantity supplied
of beef
Figure 14 increase in supply of leather
1. Price of related goods*****
(a) Joint Supply
Two goods are of joint supply
if
One of them is a by-product
of the
Other. The production of Beef and
leather is example of join supply.
When the price of beef increases,
its quantity supplied increases
( Figure 13). The supply of leather
also increases and its supply
curve shifts to the right( Figure 14).
(b)
Competitive Supply
Price($)
S
Price($) S2 S1
0
Quantity 0
Quantity
Figure 14 increase in quantity supplied of sportwear Figure 15
decrease in supply of causal wear
Two goods are of competitive supply if
they require similar inputs. Sportswear
and
casual wear is the example
of
competitive Supply. As the
price of sportwear increases, its
quantity
supplied increases
( Figure
14). Then the supply
of casual
wear decrease and
its
supply curve shift to the
left
(Figure 15)
(2) Price of Factors ***
Increase in Factor prices means
increase in
the
producer’s cost and decrease in profit.
Supply will decrease and supply
curve will
shift to
the left. The reverse is also true.
(3) Weather conditions
Good weather means a good harvest,
and
supply
will shift to the right. The reverse
is also
true.
(4) Seller’s expectation of future price
When producers expect the price of
the good
to fall in the future, they
will try
to sell more right now.
Their supply increase right now
and fall
in the future. The reverse
is also
true.
(5) Number of producers
More
producers means the increase in
market supply. The market supply will
shift to the right. The reverse is also
true.
4.8.
Effects of a change in supply*
1.Decrease in supply
S1
Price($)
P1
S0
P0 S1
S0
0
Q1
Q0
Quantity
Figure 16
Effects of decrease in supply
Decrease in supply means shift in supply
to the left from S0 to S1( figure 16) and
leads to two effects:
( a) Increase in equilibrium price from
P0 to P1( Figure 16) ;.
(b) decrease in quantity transacted from
Q0 to Q1( Figure 16), other things
being equal.
2.Increase in Supply
S0
Price($)
P0
S1
P1 S0
S1
0 Q0
Q1 Quantity
Figure 17 Effects in
increase in supply
Increase in supply means shift in supply
to the left from S0 to S1( figure 17) and
leads to two effects:
(a) Decrease in equilibrium price from
P0 to P1( Figure 17) ;.
(b) Increase in quantity transacted from
Q0
to Q1( Figure 17), other things
being equal.
Examination Tips on 4.5, 4.6, 4.7 & 4.8
1.Examation
Records:
(a) Students were examined how the cost of
production
changed affected the change in supply
(b) Students were asked to point out how
supply of
good
changed when the types of market intervention
, such as quota, tariff,
taxes were imposed or there
was
a change in the amount of imports.
(c) Students
were asked to show how supply of factors of
production
changed in labour market when there was
emigration
and importation of workers.
(d) Students
were examined how supply of good were
Affected after the implementation
of government policies,
Such as change in taxi licenses,
more land provided
For building
houses.
2
Student’s weakness in CE
(a)
Some
students did not know the cost of production affected
supply of good.
(b) Students failed to point out that supply of
private housing
Was affected by the government policies.
(c)
Students
were able to show how the supply of worker changed
After the importation of workers but did not hold the
wage
Rate constant as the information given by
the question.
Said the wage rate is fixed.
(d) Students were able to show how the supply
of good changed
When taxes were imposed on goods but failed to point
The incidence of tax burden correctly. Concerning the
Imposition of quota, some students misunderstood that
The increase in quota would lead to supply of good
To decrease.
3. Study
Guide
(a)
It is
possible that students will asked to show the
difference between quantity supplied and supply.
(b) This section should be studied together
with
Topic 6 as
the past questions were involved with
quota, tax, etc.
(c)
Student should carefully analyze the key words
given the question, such as “more land for building
private housing” or “offering more taxi licences”
in
order to decide whether supply of good or labour
increases or decreases
4.9.
Effects of change in Demand and Supply ( Part 1)
*****(
92, 95, 99)
There are some factors which affect demand only and
some factors which merely affect supply ;while
some
factors affect both demand and supply. In the
latter case,
it results in change in demand and supply.
Increase or
decrease in quantity transacted & price is
determined
by both
the direction and the relative magnitude of
change
in demand and supply.
Note: The relative magnitude is measured
by the horizontal distance between
New and original demand or supply
curves
Remarks:
In order to deepen the understanding of how
change in quantity transacted & price is
determined by both the direction and
the
relative magnitude of change in
demand
and supply, take the
following
example and help you understand it:
This economic phenomenon can be
explained by
Demand-supply diagram ( Figure 18 )
The
relative magnitude of increase in supply
Price($)
S0
S1
P1
P2
P0
D1
D0
0
Quantity
The relative
magnitude of increase in demand
Figure 18 Effects of increase in demand
and supply
Demand for
hotels and shopping centres
Increased
from D0 to D1 and its price
rose from P0 to
P1. But its supply increased
from S0 to S1
and made the price decrease from P1
to P2. The
price of properties ultimately
increased from
P0 to P2.( Figure 18)
The reason
was that the relative
magnitude of
increase in demand
outweights the relative magnitude
of increase in
supply( Figure 18).
Examination Tips on 4.9
1. Examination Record
In HKCE,
questions asked students to
explain why the price of good increased,
or decreased as demand for a good and
supply of good changed.
2.Student Weaknesses in CE
The overall
performance was poor. Students might
either failed to recognize the question was
about a comparison of change in both Demand & Supply or
failed to recognize the directions of demand & Supply.
3.Study guide
Student
must learn to see how the price and quantity
transacted change when both demand & supply change
by practicing the graphic presentation.
4.10. Demand
, Supply & Price in Labour Market *****
( 91, 94,
96, 97, 98, 99, 00)
In chapter 3, we explain how the market allocates
the
goods among the competing consumers and
the
quantity produced by the firms. The focus is
on
the product market, that is the buying and
selling
of goods and services. In this section,
we
turn our attention to the labour market to
see
how the wage rate and quantity of labour
are
determined.
In labour market, demand for
labour(
buyer) is firms
and
supply for labour (suppliers) is workers.
The equilibrium wage
rate (We) and the quantity
of
labour ( employment ) is determined at the
interaction
of market Demand and market
supply
curves (Figure 19).
Wage($) Market Demand
Market Supply
We
0
Qe
Labour
Figure 19 Equilibrium wage rate in labour
market
4.11. Factors affecting Demand for and Supply of labour
***** ( 91,
94, 96, 97, 98, 99, 00)
(1) Factors affecting Demand for labour( derived demand)
If there is a recession, demand for goods
decrease. As demand for labour
depends
on the existence of a demand for the
products that it helps to produce, then
demand for respective labour will
decreases. The reverse is true.
2.The price of related good
(a) Substitutes
Demand for a good will decrease if
Its price of substitutes decreases.
Then decrease in demand of a
good will lead to a decrease in
demand for respective labour.
The reverse is also true.
(b) Complements
Demand for a good will increase if
Its price of complements decrease.
Then increase in demand of a
good will lead to a increase in
demand for respective labour.
The
reverse is also true.
(c) Profit Tax
When the profit tax
decreases, firms will
get
more profits (after tax) from selling
of
the good. Their investment incentive
will
be enhanced. Demand for respective
labour will increase. The reverse is
also
true.
(2) Factors affecting Supply for labour
(a) The importation of workers
Wage($) S0
( local worker)
D
S1
We
We1
0 Q1 Q2 Q3 labour
Figure
20 Effects of the importation of workers
The importation of worker will cause
the equilibrium wage of workers falls
from We to We1 and employment
level of all workers will rises from
Q2 to Q3. But the employment rate of
Of
local workers will fall from Q2 to
Q1 ( Figure 20).
(b) Migration
If there is emigration in the country,
the market supply will fall and
equilibrium wage of workers rise
and employment level of all
workers in that country will fall.
If there
is immigration in that country,
market supply will rise and the equilibrium
wage of workers rises and employment
level of all workers will rise.
Examination Tips on 4.10
& 4.11:
1. Examination Records:
(a) In CE, students were examined to explain
how the effects on Demand for and supply of
labour affected the equilibrium wage
rate and the employment level.
(b) They were also asked to explain how
effects on Demand for or supply of labour
would affect the situation of ‘unemployment’
or ‘labour shortage’.
2
Student’s weakness on CE
(a)
Students misinterpreted the question was
one dealing with product market, instead
of labour market.
(b)
They didn’t know the unemployment
meant the surplus in labour
market.
(c) They
either failed to know the effects
of different conditions on demand /supply
of labour or failed
to hold the wage rate constant in
graphic presentation when the information given
by the question said the wage rate is fixed.
(d) When
asked to show the effects of importation
of workers on the employment of local workers,
students failed to show the difference between
the overall workers and local workers in their
graphical presentation.
3.Study
guide
(a) Student should learn how equilibrium
wage
rate and the employment level changes due
to factors affecting Demand or supply of
labour
(b) They should
understand how the unemployment
and shortage conditions in labour
market are worsen
or better off graphically when factors affecting
demand or supply of Labour occurs
(c) Pay attention to
how the equilibrium wage
rate of overall labour and the
employment
Level of local labour change when there is
importation of workers