(a) With the aid of a diagram, explain the effects of fixing a price (i)...
(a) With the aid of a diagram, explain the effects of fixing a price (i) above the equilibrium price,
(ii) below the equilibrium price [5 marks each]
(b) (i) What is an abnormal demand? [4 marks] (ii) Give two reasons for its occurrence [6 marks]
Explanation
(i) Above equilibrium-PA
(a) Increase in price (b) Reduced quantity demanded
(c) Increase quantity supplied
(d) Excess supply or surplus
(e) Emergence of a back market
(ii) Below equilibrium -PB
(a) Decrease In price
(b) Increase in quantity demanded
(iii) Reduced quantity supplied Shortage In the market or excess demand
v) Emergence of a black market.
(b)(i) This is demand which does not obey the law of demand For example, Abnormal demand arises when consumers demand more at higher prices
(ii) Reasons for the occurrence of abnormal demand.
(a) When prices are expected to rise further
(b) Purchase of rare commodities
(c) Giffen goods.
(iv)Articles of ostentation.
(v) Consumer ignorance and effects of advertising
(vi) Perfectly Inelastic demand
(vii) Perfectly elastic demand