Explain how the following factors will affect the demand for a commodity X: (a) a...
Explain how the following factors will affect the demand for a commodity X:
(a) a decrease in the price of a implement Y; [5 marks]
(b) an increase in consumers' disposable income; [5 marks]
(c) a decrease in the apply of a substitute P; [5 marks]
(d) an increase in income tax. [5 marks]
Explanation
(a) If the price of commodity Y which is a complement of X decreases, other things equal, more of Y will be demanded. The demand for X will therefore also increase.
(b) If disposable income (income after tax) increases; more of commodity X will be demanded, if X is a normal good. Less of commodity X will be demanded, if X is an inferior good. Demand for X will not change if X is a good subject to satiety.
(c) Other things equal, the price of P will increase. X will therefore become more attractive. Hence the demand for X will increase.
(d) Increase in income tax will reduce consumers' disposable income. Other things equal, less of X will be demanded if X is a normal good. More of X will be demanded if X is an inferior good. The quantity demanded of X will not change if X is a good subject to satiety.