Theory question 103
Theory of DemandExplain how the following factors will affect the demand for a commodity X: (a) a decrease in the price of a complement Y; (b) an increase in consumers' disposable income; (c) a decrease in the supply of a substitute P; (d) an increase in income tax.
Show the model answer
Model answer
(a) Y becomes cheaper, so more Y is bought; since X is used with Y, demand for X increases (curve shifts right).
(b) Higher disposable income raises demand for X if it is a normal good (shift right); if X is inferior, demand falls.
(c) Less supply of P raises its price, so consumers switch to X: demand for X increases.
(d) Higher income tax reduces disposable income, so demand for X (a normal good) decreases (shift left).
Explanation
Each factor shifts the whole demand curve for X.