DHS Price Mechanism and Its Applications

©DHS2025 1 DUNMAN HIGH SCHOOL (SENIOR HIGH) ECONOMICS UNIT 2025 YEAR 5 H1 Theme 2: Markets 2.1 Price Mechanism and Its Applications Section A Check your concepts: Demand 1. Define demand. 2. State the Law of Demand and explain why the demand curve is downward sloping. 3. When a price increases, the law of demand suggests that the quantity demanded will increase / decrease* while the law of supply suggests that the quantity supplied will increase / decrease* . Therefore, the demand curve is upward / downward* sloping while the supply curve is upward / downward* sloping. When the price of a good such as beef decreases, quantity demanded for it will ____________. We say that there exists a/an direct / inverse* relationship between the price and quantity demanded. Now, consider what happens to the demand when, at the same time of the reduction in price of beef, the government launches a healthy lifestyle campaign warning the public about the problems of excessive red meat intake. While the reduction in the price of beef will cause quantity demanded to ________, the healthy lifestyle campaign will cause the quantity demanded to ___________ at each and every price. So when we say that the quantity demanded of a good varies ___________ with its price, we are actually making the assumption of _______________________.

©DHS2025 2 4. Below is a table showing the market demand for green beans. Study the data in the table, and plot the demand for green beans on a graph paper. Label the demand curve “D,” and answer the questions. Demand for Green Beans in a year Price ($/kg) $0.10 $0.15 $0.20 $0.25 $0.30 $0.35 $0.40 Quantity demanded (‘000 kg) 350 300 250 200 150 100 50 Figure 1: The data for demand curve “D” indicate that at a price of $0.30 per kg, buyers would be willing to buy _______ thousand kg of green beans. Other things constant, if the price of green beans increased to $0.40 per kg, buyers would be willing to buy _______ thousand kg. Such a change would be called a(n) increase / decrease* in demand / quantity demanded*. Other things constant, if the price of green beans decreased to $0.20 per kg, buyers would be willing to buy _______ thousand kg. Such a change would be called a(n) increase / decrease* in demand / quantity demanded*. Now let’s suppose that a dramatic increase in income tax rates reduces the disposable income of consumers. This change in the ceteris paribus conditions underlying the original demand for green beans will result in a decrease in demand, and we would have a new set of data such as that shown in the following table. Study the data in the new table, and plot the new demand curve (on the same axes in Figure 1). Label the new demand curve “D1” and then answer the questions below.

©DHS2025 3 Decrease in the Demand for Green Beans Price ($/kg) $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 $0.35 $0.40 Initial quantity demanded (‘000 kg) 400 350 300 250 200 150 100 50 New quantity demanded (‘000 kg) 300 250 200 150 100 50 - - Comparing the new demand curve (D1) with the old demand curve (D), we can say that a decrease in the demand for green beans results in a shift of the demand curve to the right / left* . Such a shift indicates that at each of the possible prices shown, buyers are now willing and able to buy a smaller / larger* quantity, and at each of the possible quantities shown. 6. Different types of demand relationship Type of demand relationship Given examples Your examples Competitive demand Coffee and tea Joint demand Cars and petrol Derived demand Steel and cars Composite demand Crude oil can be distilled and used to satisfy the demand for both electricity and synthetic fibre. 7. An increase in demand occurs when a. The good is inferior and income _____________________ b. The price of a substitute good _____________________ c. The price of a complementary good __________________ d. Population _____________ e. Consumers tastes shift favour of / away from* the product f. Consumers expect a(n) ________ price in the future

©DHS2025 4 WRITING EXERCISE 8. Read the extract before attempting the question Rise of fast-fashion Shein, Temu roils global air cargo industry The rapid rise of fast-fashion e-commerce retailers such as Shein and Temu is upending the global air cargo industry, as they increasingly vie for limited air-cargo space to woo consumers with rapid transit times. Shein, Temu and TikTok Shop, which recently began online shopping in the US, send the majority of their products directly from factories in China to shoppers by air. And their growing popularity - Shein and Temu together send almost 600,000 packages to the United States every day, according to a June 2023 report by the US Congress - is a boost to air-freight from Asian hubs like Guangzhou and Hong Kong, making off- peak seasons almost disappear. Source: CNA 21 Feb 2024 Using an appropriate diagram, explain how the above development affects the demand in the air cargo market. [4]

©DHS2025 5 Check your concepts: Supply 9. Define supply. 10. State the Law of Supply and explain why the supply curve is upward sloping. 11. When the price of a good such as beef decreases, farmers will keep more / fewer* cows for milk rather than slaughter them for meat. We say that there exists a/an direct / inverse* relationship between the price of beef and quantity supplied of beef. Now, consider what happens to the supply when, at the same time of the reduction in price of beef, the price of leather increases. While the reduction in the price of beef will cause quantity supplied of beef to ________, the increase in the price of leather will cause the quantity supplied of beef to ___________ at each and every price. So when we say that the quantity supplied of a good varies ___________ with its price, we are actually making the assumption of _______________________. 12. In this problem, and those that follow, we will assume that the long-run supply curve for green beans is “upward sloping.” Study the data in the table below, and plot the supply for green beans. Label the supply curve “S,” and answer the questions on the following pages. Supply of Green Beans in a year Price ($/kg) $0.15 $0.20 $0.25 $0.30 $0.35 $0.40 Quantity supplied (‘000 kg) 100 150 200 250 300 350 Figure 2:

©DHS2025 6 The data for supply curve “S” indicates that at a price of $0.25 per kg of green beans suppliers would be willing to offer _______ thousand kg of green beans. Other things constant, if the price of green beans increased to $0.30 per kg, suppliers would be willing to offer _______ thousand kg of green beans. Such a change would be a(n) increase / decrease* in supply / quantity supplied*. Other things constant, if the price of green beans decreased to $0.20 per kg, suppliers would be willing to offer _______ thousand kg of green beans. Such a change would be called a(n) increase / decrease* in supply / quantity supplied*. Now let’s suppose that there is a dramatic increase in the price of several of the inputs used in growing green beans (e.g. fertilizer, seeds). This change in the ceteris paribus conditions underlying the original supply of green beans will result in a(n) increase / decrease* in marginal cost and a(n) increase / decrease* in supply by firms to capture the positive marginal profit / avoid the marginal loss*. We would have a new set of data such as that shown in the following table. Study the data in the new table, and plot this supply of green beans using the same axes in Figure 2. Label the new supply curve “S1” and answer the questions below. Decrease in the Supply of Green Beans Price ($/kg) $0.15 $0.20 $0.25 $0.30 $0.35 $0.40 Initial quantity supplied (‘000 kg) 100 150 200 250 300 350 New quantity supplied (‘000 kg) - 50 100 150 200 250