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UNIT 5. Demand and supply.

Introduction.

 

TEXT A.
Suppose that a grocer who sells coffee at 1.50 a kilo considers changing the price. The graph to the right predicts the possible weekly sales of coffee if he sells it at any price between 3 a kilo and 50p a kilo.

Exercise 1.
Answer these questions about the graph in Text A.
a. If the price is 3.00 per kilo, how much will weekly sales be?
b. How much does the grocer charge per kilo if he sells 30 kilos a week?
c. How much will be sold a week at 50p per kilo?

Exercise 2.
Choose the correct alternatives.
When all other relevant factors are held constant, customers will continue buying a particular product for as long as they think they (a) are/are not getting value for money. That is, they will buy it only if they think that the price asked is (b) less/more than the price that they are prepared to pay in order to satisfy their needs. But if the grocer (c) increases/decreases the price of his coffee, his customers may decide that the value of the product is less than the price. In other words, the coffee is too expensive. The (d) grocer/customers can take two possible courses of action. They can either buy (e) less and less/more and more coffee from the grocer, or buy from a different grocer who sells coffee at a (f) lower/higher price.

CLUES:b. Will the customers buy the product if the price is more than they are willing to pay for it?
c. Notice the word 'but'.
d. Notice the word 'they' at the beginning of the next sentence.
e. Will the customers buy more at the higher price?
f. Will they buy from a second grocer who asks a higher price?

Focus: General conditionals.

Look at these sentences.
Will the customers prefer to buy coffee at a low price of 1.00 a kilo or at a higher price of 1.50p a kilo?
Usually they will prefer to buy at the cheap price. But under some conditions they will buy the more expensive coffee.
Here are some of those conditions:
They will buy the more expensive coffee if they believe that the cheap coffee does not taste so good.
or They will buy the more expensive coffee if the more expensive coffee is better advertised.
or They will buy the more expensive coffee if the nearest grocer does not sell the cheap coffee.
These conditions are possible. For instance, it is quite possible that the customers believe that the cheap coffee does not taste so good.

Here are the most common ways of making general conditionals using if :
If the supply of oil decreases, the price will increase.
or The price of oil will increase if the supply decreases.
or If the supply of oil decreases, the price increases.
or The price of oil increases if the supply decreases.

Exercise 3.
Match each condition and the clause that fits it, and write them in your notebook.

a. A shopkeeper sells a product (Item A). If he increases its price, 1. if they decide to buy the same quantity of Item A at the new high price.
b. If they spend as much as before on the new low quantity of Item A,2. if all shopkeepers charge the same price.
c. But they will have to reduce their expenditure on Items B and C,3. then his customers will perhaps buy less of Item A.
d. If one shopkeeper keeps the price of Item A the same when all other shopkeepers increase it,4. then they will have as much as before to spend on other products (Items B and C).
c. A customer will not have a favourite shop,5. then he can win customers from his competitors.
f. Customers will buy at the most convenient shops,6. if they know that the price is the same everywhere.
CLUES:a. If he increases the price, will customers buy a greater quantity, the same quantity, or a lesser quantity?
b.
If they spend as much, will they have more money to spend on other products, less, or the same?
e. This assumes that several shops are equally convenient, and are the same distance from his home or place of work. Of course, if one shop is close to his house and the others are distant, then he may continue to patronize it even if it increases its price.
1. If customers buy the same quantity at the new price, do they have the same amount of money to spend on other products? More money? Less money?

 

Exercise 4.
Assume that Mr Jones spends 40p a week buying apples. Apples cost 8p each.
a. How many apples can Mr Jones buy?
One day, the cost of apples is increased to 10p each.
b. How many apples can Mr Jones now buy with his 40p?
Your answer tells you that Mr Jones now buys fewer apples than before.
c. Which of these predictive statements explains 'Mr Jones' change of behaviour?
1. If the price of a product decreases, then demand for it will increase.
2. If the price of a product increases, then demand for it will decrease.
3. If the price of a product remains constant, then demand for it remains constant (unchanged).
Then Mr Jones receives a rise in his weekly wage, and he now spends 50p a week buying apples.
d. How many apples can Mr Jones now buy (at 10p each)?

Now look at your answers to a and d
e. Does Mr Jones buy the same number of apples (in a and d) or a different number?
f. Which of these factors has changed?
1. Mr Jones' spending power (the amount of money he can spend).
2. Mr Jones' demand for apples.

CLUES:c. Has the price increased? Is he now buying more or fewer apples?
f. Is Mr Jones paid the same wage in both cases?

 

Exercise 5.
If you are working on your own, complete passage 1 with the phrases given after it. If you are working with a friend, one of you complete passage 1 and the other complete passage 2. Write the completed passages in your notebook.

PASSAGE 1.
When the economist makes a predictive statement about the relationship between two factors, he assumes that all other relevant factors remain unchanged. For example, he may write 'If the price (a) ______', and he ignores all other factors that (b) ______ to the demand.
The factors that the economist ignores include (c) ______; he assumes that they have the same money to spend after the price has risen as they did before it rose. Of course, (d) ______ in real life; people may be paid more (c) ______. Other factors that the economist does not take into account when writing 'If the price of a product rises, demand for it falls', include changes (f) ______, and the supply of substitute products. The economist has to ignore these factors; if he tried to take all possible changes into account, (g) ______. This principle of assuming all other relevant factors to be equal is called ceteris paribus.

PASSAGE 1 PHRASES.
1. then he could not make any predictive conditional statements
2. in taste, the level of advertising
3. the buyers' spending power
4. of a product rises, demand for it falls
5. might make a difference
6. and be able to buy more of the product after the price rise
7. this may not be the case.

CLUES:If you are working on your own, check your answer by completing passage 2. But be careful! The two passages are slightly different.

PASSAGE 2.
The economist ignores such factors as the buyers' spending power; he (h) ______ the price rose as they did before. In real life, (i) ______; for instance, people may receive wage increases and then buy more of a product even after its price has risen. The prediction made by the statement (j) ______ also does not (k) _______ changes in taste, the supply of substitute products, and the level of advertising. If (l) _______, he could not make any predictive statement about the effect of price on demand, and so he ignores them.
This principle of supposing all other relevant factors to be unchanged is called ceteris paribus.
The economist assumes that all other relevant factors remain unchanged when he makes a predictive statement about any two factors, (m) ______ 'If the price of any product rises, then the demand for it will fall; he (n) ______ that might make a difference to the demand.

PASSAGE 2 PHRASES.
1. 'If the price of any product rises, then demand for it will fall'
2. takes it for granted that they have the same money to spend after
3. An example is given by the prediction
4. this is not always true
5. take into account such factors as
6. he tried to take note of all these possible changes
7. has to ignore all those other factors.

CLUES:Compare the completed passages 1 and 2. But be careful! The two passages are slightly different.

The paragraphs in passages 1 and 2 are differently ordered. Decide which paragraph should come first, and which passage is best.

CLUES:Which paragraph introduces the notion that economic predictions of change do not attempt to account for all possible factors? Which gives examples of factors which the prediction may ignore?

 

Reading.

Exercise 6.
Read this short text.
Several surveys(1) have shown that the government's Coconut Replanting Scheme (CRS)(2) has succeeded in its main objective of encouraging small-holders to invest a greater percentage of their capital in clearing new land and planting new trees(3). But the scheme has been less successful in encouraging a growth of demand for coconut products.
1. Report of the survey of coconut farms in the Tojoh District 1978. Survey Report of the Coconut Products Developers Scheme, 1979, Annual Reports by the CRS m 1976-1983.
2. The extension of the scheme in the northern provinces is being considered, where it will be known as the Coconut Replanting and Rehabilitation Scheme (CRRS).
3. Objectives are set out m the Founding Charter of the CRS 1976.

Now answer these questions.
a. What is the function of the numbers in the text ( . . .surveys* . . , Scheme (CRS) ... new trees.)?
1. They give line numbers.
2. They refer to the footnotes below the text.
3. They refer to other pages in the book.
b. What is the function of the footnotes?
1. They provide additional information and explanations which only a few readers may want.
2. They provide essential information which all readers should read.
3. They provide new information which has been added to the book since it was first written.

CLUES:Look at the examples in Text B.

 

TEXT B.

Every manufacturer knows that demand for his product is easily affected by what happens elsewhere in the market. If he sells rice, he keeps a careful eye on the prices charged by other rice dealers. He is also interested in the demand for other food products that people might eat instead of rice if rice becomes too expensive - maize and bread, for instance
There are three ways in which different products may be described in relation to each other. Firstly, if there is a rise in demand for one product (product X), this causes a fall in demand for a substitute product (product Y), ceteris paribus.(1)
Secondly, if there is a rise in the demand for product X, this leads to a rise in the demand for a complementary product (product Z)(2). Thirdly, a change in the demand for product X does not cause any change in the demand for an unrelated product (product A).(3)
1. A substitute product may be defined as a product which can be used as a replacement for the first product. If you look back at the first paragraph you will see an example there: when rice becomes expensive maize and bread are used as substitutes.
A complementary product may be defined as a product which is used together with the first product. For instance, cars need petrol if the demand for cars rises the demand for petrol also rises. Therefore petrol is a complementary product to cars.
Products are unrelated if demand for one does not affect demand for the other. For example, coffee, cabbages, petrol, books are all unrelated. A rise in the demand for coffee does not change the demand for cabbages.

 

Exercise 7.
a. What do the footnotes in Text B do?
1. They define and exemplify.
2. They make economic predictions.
3. They refer to other facts.
b. Are these sentences true or false (ceteris paribus)?
1. If the price of cotton rises, demand for synthetic fibres falls.
2. If the price of cassette players rises, then demand for tape cassettes will fall.
3. If the demand for tobacco rises, there is a rise in the price of newspapers.

CLUES:a. Your answers to Exercise 8 will help you.
bl. Remember that synthetic fibres are used to make clothing. ('Synthetic' means artificial.) Are synthetic fibres substitute, complimentary, or unrelated to cotton? b2. Are cassette players substitute, complementary, or unrelated to tape cassettes?
b3. What is the relationship between tobacco and newspapers?

 

Exercise 8.
Exercise 5 told you that conditionals can make predictive statements that are generally true. But not all conditionals are predictive. The sentences on the left come from Text B. Decide how each can be described.

a. If he sells rice, he keeps a careful eye on the prices charged by other rice dealers, 1. an economic prediction that is generally true
2. an example
3. a definition of a term
b. ... if there is a rise in demand for one product (product X), this causes a fall in demand for a substitute product (product Y) . . .1. an economic prediction that is generally true
2. an example
3. a direction to the reader
c. If you look back at the first paragraph, you will see an example there; ...1. an economic prediction that is generally true
2. a definition of a term
3. a direction to the reader
d. Products are unrelated if demand for one does not affect demand for the other.1. an economic prediction that is generally true
2. an example
3. a definition.
CLUES:Look at the contexts in Text B!
a. Look at the sentence that precedes (comes before) this in the text.
b. Is this generally true or true for only one particular product?
c. This can be rewritten: 'Look back at the first paragraph and you will see an example there; . . .'
d. Compare this first sentence of footnote 3 to the first sentence of footnote 2.

 

Exercise 9.
Read this short paragraph.
In the case of almost all commodities, the quantity demanded increases as the price of the commodity falls, income, tastes and all other prices remaining constant. As its price falls, a commodity becomes cheaper relative to its substitutes, and it is therefore easier for it to compete against these substitutes for the household's attention. If, for example, . . .
a. Which of these titles do you 'think fits the text best?
1. The price of complementary products
2. The price of a commodity
3.Household purchases
b. What two-word phrase could the writer use instead of the words 'income, tastes and all other prices remaining constant'?
c. Which of these sentences do you think fits best after the words 'If, for example . . .' in the last line?
1. cheese becomes very cheap, the household will be induced (persuaded) to buy more cheese and less of other high protein foods such as meat whose prices are now high in comparison to the price of cheese.
2. coffee becomes very cheap, the household will be induced to buy more of products such as sugar, which is used together with coffee.
3. the price of television sets changes, this will not have any effect on the demand for winter clothing or cabbages.

CLUES:a. Look at the title of Text C.
b. Look at the last sentence of passage 1 in Exercise 5.
c. Which sentence gives an example of increased demand for a product relative to demand for a substitute product?
Look at Text C (but be careful; the example is slightly different).

 

Now read the complete text.
TEXT C.
The price of a commodity.
In the case of almost all commodities, the quantity demanded increases as the price of the commodity falls, income, tastes and all other prices remaining constant As its price falls, a commodity becomes cheaper relative to its substitutes, and it is therefore easier for it to compete against these substitutes for the household's attention. If, for example, carrots become very cheap, the household will be induced up to a point, to buy more carrots and less of other vegetables whose prices are now high relative to the price of carrots.
To illustrate the relation between the quantity of a commodity demanded and its price, we shall take imaginary data for the prices and quantities of carrots. The table is an example of what is called a demand schedule. It shows the quantity of carrots that a household would demand at six selected prices. For example, at a price of 10 per ton, the quantity demanded is 10-25 lbs per month. Each of the price-quantity combinations in the table is given a letter for easy reference.
We can now plot the data from the table on a graph, with price on the vertical axis and quantity on the horizontal one. In the graph we have plotted the six points corresponding to the price-quantity combinations shown in the table. Point n on the graph shows the same information as the first row of the table - at 20 a ton, 14 lbs of carrots will be demanded by the household each month. Point t shows the same information as the last row of the table: when the price is 120 a ton, the quantity demanded will be only 2-5 lbs per month.

Table
A household's demand schedule of carrots
Price ( per ton)Quantity demanded
(lbs per month)

n

20

14,0

p

40

10,2

q

60

7,5

r

80

5,2

s

100

3,5

t

120

2,5

We can now draw a smooth curve through these points. This curve is called the demand curve for carrots. It shows the quantity of carrots that the household would like to buy at every possible price, its downward slope indicates that the quantity demanded increases as the price falls.

Lipsey R.G. An Introduction to Positive Economics (Weidenfeld and Nicolson, 1965) English Language Book Society, 5th edition 1979.

 

Exercise 10.
Complete this sentences from the information given in TEXT C.
a. If ______, then it will became cheaper relative to its substitutes.
b. If the commodity becomes cheaper relative to its substitutes, ______.
c. If carrots cost 60 per ton, then the quantity demanded ______.

CLUES:a,b. Look at Text C.
c. Look at Text C, the demand schedule.

 

Exercise 11.
The figures below give a household's demand schedule for potatoes.

Price ( per ton)Quantity demanded (lbs per year)

25
50
75
100
125
150

260
154
112.5
78
52.5
37.5

a. In your notebook, draw a graph to show the demand curve.
b. If the price is 100 per ton, how many lbs will the household demand each month?

CLUES:Notice that the demand schedule gives quantities per year.

 

Exercise 12.
What foods do people buy a lot of in your country? What are their substitute products? Write down a household's demand schedule for one common food.

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