r actors of Supply and Demand 1. Which of the following events would tend to increase the demand for widgets? a. An increase in the cost ofproducing widgets b. An increase in the price of gadgets...

Question 1
Demand for a product is affected by the following factors:
 Price of the product itself
 Price of the substitutes
 Price of the complements
 Income of the consumers
 Number of consumers
 Tastes and preferences of the consumer
 Market expectations
An important distinction between increase in quantity demanded and increase in demand
needs to be noticed. While a change in the own price causes a movement along the curve, a
change in factors other than the own price, will cause an increase or decrease in demand.
a) Increase in the cost of producing widgets will cause the supply curve of the widgets to
shift to the left, causing an upward movement along the demand curve. Hence this
factor will not tend to increase the demand for widgets.
) Increase in the price of substitutes (here gadgets) reduces the quantity demanded for
gadgets, following the Law of Demand. This causes consumers to switch from
gadgets market to widgets market and hence, they start demanding more widgets.
Hence, an increase in the price of gadgets will increase in the demand for
widgets.
c) Increase in the price of complements (here trinkets) reduces its quantity demanded,
following the Law of Demand. This causes consumers to start purchasing widgets
also and hence, they start demanding less widgets. Hence, an increase in the price of
trinkets will decrease and not increase in the demand for widgets.
d) An increase in the number of buyers in the widget market will increase the demand
for widgets as it is one of the factors, other than the price that affects the demand.
Thus, it will increase in the demand for widgets.
e) An increase in the number of sellers in the widget market will shift the supply curve
to the right, therefore causing a downward movement along the demand curve for
widgets. Thus, it will not increase in the demand for widgets.
f) An increase in the income of consumers will encourage them to buy more widgets as
widgets are normal goods. Normal goods are demanded more when the income of
consumer increases. Thus, it will increase in the demand for widgets.
g) Consumers’ expectation play a major role in determining the demand pattern. When
consumers expect a rise in future price of widgets, they will try to make a purchase
now than in future. Hence, this will increase in the demand for widgets.
h) Improvement in the technology will cause the supply curve of the widgets to shift to
the right, causing a downward movement along the demand curve. Hence this factor
will not tend to increase the demand for widgets.
i) When sellers expect a higher price for their product in future, they tend to supply less
now and so the supply curve of the widgets to shift to the left, causing an upward
movement along the demand curve. Hence this factor will not increase the demand
for widgets.
j) An increase in the supply of widgets causes the supply curve of the widgets to shift to
the right, causing a downward movement along the demand curve. Hence this factor
will not increase the demand for widgets.
Question 2
In contrast, the supply of a product is affected by the following factors:
 Price of the product itself
 Price of the inputs
aw materials
 Wage rate/cost of labor
 Number of producers
 State of technology
 Market expectations
As mentioned, price of the product itself causes a movement along the supply curve while
factors other than the price cause a shift in the supply curve.
a) Increase in the cost of producing widgets will cause...