SOLUTIONS TO ECS1501 ASSIGNMENT 2 08 MARCH 2018 23:03 Fortune 065 9414 079
2.1 Which one of the following statements regarding the demand for a good or service is correct?
[4] The demand for a product refers to the quantities of the product that potential buyers are willing and able to
buy.
Reason: Option 4 is the only statement that correctly explains 'demand".
2.2 In terms of the law of supply
[2] a decrease in the price of a good or service decreases the quantity supplied.
Reason: The law of supply states that increase in price will result in an increase in quantity supplied and vise versa. See
the following for further graphical explanation.
Questions 2.3 to 2.9 are based on the following data for ice cream:
Use this data to draw the market for ice cream using the following diagram:
2.3 According to the law of demand a decrease in the price of ice cream from R8 to R4
[1] will increase the quantity demanded by 400 since a negative relationship exists between the price and
quantity demanded.
, SOLUTIONS TO ECS1501 ASSIGNMENT 2 08 MARCH 2018 23:03 Fortune 065 9414 079
Reason: When they say negative relationship it means that if one variable (price) goes down (decrease), the other will go
up (increase)-negative relationship. Quantity demanded calculation: 700(@Price R4 on the demand curve) minus 300 (@
price R8 on the demand curve) equals 400 increase in quantity demanded.
2.4 If the price is higher than the equilibrium price
[3] An excess supply is created on the market which results in downward pressure on the price as supplier are
trying to get rid of unsold stock. This process continues until the market equilibrium price of R6 is reached.
Reason: At any price above the equilibrium price, an excess supply develops in the market. Most sellers will lower the
price until the new equilibrium is reached, in this case it is reached at the price of R6.00
2.5 Which one of the following events will probably cause a rightward shift of the demand curve for ice cream?
[1] An increase in the price of a substitute for ice cream such as an ice drink.
Reason: Take the given two examples (ice drink and ice cream). If the price of ice drink (substitute for ice cream) increases,
then less ice drink will be demanded, as consumers demand less of it, they SWITCH to consuming MORE ice creams. Thus the
demand for ice creams will increase. NB: Please read this reason over and over until you surely understand what it explains.
Full explanation of how this shown on a graph can be done on a face to face session.
2.6 It is a very hot summer and the demand for ice cream increases which causes an increase in the equilibrium price to R8.
Which of the following events is likely to have taken place on the market?
[4] At each price a lower quantity of ice cream was demanded.
Reason: Trace your price at R6 where it cuts the demand curve to the corresponding quantity of 500 (at equilibrium),
then the question/statement says that the price increased to R8, now trace your NEW price of R8 to its corresponding
quantity of 300. The upshot is that quantity demanded decreases by 200-thus a lower quantity of ice cream was
demanded.
2.7 What will happen to the equilibrium position if there is a decrease in the price of milk that is used in the production of ice
cream?
[3] The equilibrium price will decrease and the equilibrium quantity will increase.
2.1 Which one of the following statements regarding the demand for a good or service is correct?
[4] The demand for a product refers to the quantities of the product that potential buyers are willing and able to
buy.
Reason: Option 4 is the only statement that correctly explains 'demand".
2.2 In terms of the law of supply
[2] a decrease in the price of a good or service decreases the quantity supplied.
Reason: The law of supply states that increase in price will result in an increase in quantity supplied and vise versa. See
the following for further graphical explanation.
Questions 2.3 to 2.9 are based on the following data for ice cream:
Use this data to draw the market for ice cream using the following diagram:
2.3 According to the law of demand a decrease in the price of ice cream from R8 to R4
[1] will increase the quantity demanded by 400 since a negative relationship exists between the price and
quantity demanded.
, SOLUTIONS TO ECS1501 ASSIGNMENT 2 08 MARCH 2018 23:03 Fortune 065 9414 079
Reason: When they say negative relationship it means that if one variable (price) goes down (decrease), the other will go
up (increase)-negative relationship. Quantity demanded calculation: 700(@Price R4 on the demand curve) minus 300 (@
price R8 on the demand curve) equals 400 increase in quantity demanded.
2.4 If the price is higher than the equilibrium price
[3] An excess supply is created on the market which results in downward pressure on the price as supplier are
trying to get rid of unsold stock. This process continues until the market equilibrium price of R6 is reached.
Reason: At any price above the equilibrium price, an excess supply develops in the market. Most sellers will lower the
price until the new equilibrium is reached, in this case it is reached at the price of R6.00
2.5 Which one of the following events will probably cause a rightward shift of the demand curve for ice cream?
[1] An increase in the price of a substitute for ice cream such as an ice drink.
Reason: Take the given two examples (ice drink and ice cream). If the price of ice drink (substitute for ice cream) increases,
then less ice drink will be demanded, as consumers demand less of it, they SWITCH to consuming MORE ice creams. Thus the
demand for ice creams will increase. NB: Please read this reason over and over until you surely understand what it explains.
Full explanation of how this shown on a graph can be done on a face to face session.
2.6 It is a very hot summer and the demand for ice cream increases which causes an increase in the equilibrium price to R8.
Which of the following events is likely to have taken place on the market?
[4] At each price a lower quantity of ice cream was demanded.
Reason: Trace your price at R6 where it cuts the demand curve to the corresponding quantity of 500 (at equilibrium),
then the question/statement says that the price increased to R8, now trace your NEW price of R8 to its corresponding
quantity of 300. The upshot is that quantity demanded decreases by 200-thus a lower quantity of ice cream was
demanded.
2.7 What will happen to the equilibrium position if there is a decrease in the price of milk that is used in the production of ice
cream?
[3] The equilibrium price will decrease and the equilibrium quantity will increase.
