Chapter 5

Revision Questions MEMO

1) Use a diagram to illustrate what will happen to the equilibrium price and quantity of
a product if the demand for the product increases. Also mention three factors that
can cause an increase in demand.

The answer is illustrated in the figure

on the right

Any factor other than a change in the

price of the product can cause a
change in demand.
 An increase in demand could be
the result of an increase in the
price of a substitute product
 a decrease in the price of a
complementary product
 an increase in consumers’
income
 a greater consumer preference
for the good
 an expected increase in the price
of the product.

2) Do the same as in question 1 for (a) an increase in supply, (b) a decrease in demand
and (c) a decrease in supply.
 The possible reasons for (a) an increase in supply includes any factor except a change in
the price of the product. Three possible reasons are:
 a fall in the price of an alternative product or a rise in the price of a joint product
 a reduction in the price of any of the factors of production or other inputs (ie a
decrease in the cost of production) an improvement in the productivity of the
factors of production (eg as a result of technological progress) – this also lowers the
cost of production.

The possible reasons for (b) a decrease in demand include any factor except a change in
the price of the product. Five possible reasons are:
 a fall in the price of a substitute product
 an increase in the price of a complementary product
 a fall in consumers’ income
 a reduced preference for the product
 an expected fall in the price of the product.

Possible reasons for (c) a decrease in supply include any factor except a change in the price
of the product. Three possible reasons are:
 an increase in the price of an alternative product or a fall in the price of a joint
product
 an increase in the price of any of the factors of production or other inputs (ie an
increase in the cost of production)
 a deterioration in the productivity of the factors of production (which also raises the
cost of production).

3) Explain, with the aid of a diagram, what will happen if the government fixes a
minimum price for maize above the equilibrium price.
The answer is provided on pages 148-149 of the textbook. The key points are the
following. At the minimum price there will be an excess supply of the product (i.e a
surplus). Since the price is not allowed to decrease, market forces cannot eliminate the
surplus and government usually has to intervene, for example, by purchasing and
exporting the surplus, or storing it (if the product is non-perishable). Government can also
 issue production quotas to limit production (supply) to the quantity demanded.
Otherwise, the surplus may also be destroyed.

4) Explain, with the aid of a diagram, what will happen if the government fixes a
maximum price for maize meal below the equilibrium price.
5) Explain, with the aid of diagrams, how each of the following will affect the market for
coffee:
a. The price of tea declines sharply.
Coffee and tea are substitutes. When the price of tea declines sharply, there will
be an increase in the quantity of tea demanded. In the market for coffee, the
demand for coffee will fall, illustrated by a leftward shift of the demand curve. This
will give rise to a lower price and a lower quantity sold than before (ceteris
paribus).

b. Researchers find that drinking a cup of coffee a day reduces the probability of
having a heart attack.
There will be an increased preference for coffee, illustrated by a rightward shift of
the demand curve. The equilibrium price and the equilibrium quantity will both
increase (ceteris paribus).

c. A severe frost destroys much of the Brazilian coffee crop.

There will be a decrease in the supply of coffee, illustrated by a leftward shift of
the supply curve. The equilibrium price will increase and the equilibrium quantity
will fall (ceteris paribus).

d. Coffee prices are expected to rise rapidly in the next few months.
If coffee prices are expected to rise rapidly in the near future, consumers will tend
to buy sooner, with the result that the demand will increase, illustrated by a
rightward shift of the demand curve. The equilibrium price and equilibrium
quantity will both increase (ceteris paribus). (It is assumed that there is too little
time for any adjustment on the supply side.)

e. Workers in the coffee industry go on strike.

If the workers go on strike, the supply of coffee will tend to fall, illustrated by a
leftward (upward) shift of the supply curve. This will result in an increase in the
equilibrium price and a decrease in the equilibrium quantity, ceteris paribus.

Multiple choice questions

1) If the price and the quantity of beer decrease, it is likely that:

a) demand for beer has increased.

b) demand for beer has decreased.
c) supply of beer has decreased.
d) supply of beer has increased.
e) supply and demand for beer have both increased.
2) If the price of 3G data bundles, a substitute for fixed-line data bundles, decreases, then:
a) the supply curve of fixed-line data bundles will shift to the right.
b) the demand curve for fixed-line data bundles will shift to the right.
c) the equilibrium quantity and price of fixed-line data bundles will not change.
d) the quantity of fixed-line data bundles demanded will increase.
e) the demand curve for fixed-line data bundles will shift to the left.

3) The equilibrium price of rhino horns will increase if, ceteris paribus:
a) consumers are more aware that there are no medical benefits from rhino horn
consumption.
b) there is a surplus of rhino horns.
c) the supply of rhino horns decreases.
d) rhino horn is a normal good and income decreases.
e) a and c above.

4) Which of the following will definitely result in a decrease in the equilibrium price of a good?
a) An increase in both demand and supply.
b) A decrease in both demand and supply.
c) An increase in demand together with a decrease in supply.
d) A decrease in demand together with an increase in supply.
e) A decrease in supply only.

5) If the price and the quantity of curtains exchanged falls, it is likely that
a) demand for curtains has increased.
b) demand for curtains has decreased.
c) supply of curtains has decreased.
d) supply of curtains has increased.
e) supply and demand for curtains have both increased.

6) Consider the market for South African biltong. Assuming everything else remains unchanged, the
equilibrium price of biltong will decrease if
a) there is a shortage of biltong.
b) the price of beer, a complement, increases.
c) the supply of biltong decreases.
d) the price of peanuts, a substitute, increases.
e) there is an animal disease that affects the supply of biltong.

7) Consider the demand and supply of labour in the sugar industry. If there is a minimum wage in
this industry (above equilibrium wage/price), then the effect of removing this minimum wage
would be to
a) increase the equilibrium price (wage) and increase the quantity of labour demanded.
b) decrease the equilibrium price (wage) and remove the shortage of labour.
c) decrease the equilibrium price (wage) and remove the surplus of labour.
d) increase the equilibrium price (wage) and cause a shortage of labour.
e) none of the above.

8) Which one of the following will not cause an increase in the demand for cement?
a) The government launches a major new construction programme.
b) The construction of a large new dam in Limpopo.
c) A major new housing project in Mpumalanga.
d) An expected decrease in the price of cement.
 e) The construction of a new power station by Eskom.

9) Which one of the following will not lead to a decrease in the demand for petrol?
a) Motorists switch to motorcars that use diesel rather than motorcars that use fuel.
b) A decrease in consumers’ incomes, forcing them to travel less.
c) An expected fall in the price of petrol.
d) An increase in the prices of motorcars.
e) An increase in the price of petrol.

10) Which one of the following statements is incorrect?

If government sets a price ceiling below the equilibrium price:
a) the market cannot fulfil its rationing function.
b) a black market may develop.
c) consumers who are able to obtain the product may resell it to other consumers at higher
prices.
d) the government would have to devise plans about how to get rid of the surplus.
e) the market forces of supply and demand are prevented from eliminating excess demand.