Help!! I REALLY DON'T KNOW HOW TO WRITE P1 Qs

[bluerain16]

a) Using diagrams, explain how a change in one of the determinants of demand might increase the price of rice and how a change in one of the determinants of supply might decrease the price of rice.

This is the part a) question my tutor gave me and I don't get it. Please help xx.

[Vighnesh]

Ok. So, to answer this question, first split it into two parts. The first part will focus on changes in demand causing an increase in price and the second part will focus on changes in supply causing a decrease in price. 

Keep in mind that since the question mentions "determinants", you would have to talk about a factor that SHIFTS the demand and supply curves in the context of rice.

We are looking for factors that cause an increase in demand and an increase in supply, as both work to increase the price and decrease the price of the good, respectively.

One factor that you could talk about is probably that an increase in demand for rice could be caused by more preferences in favor of the good as people may have become more aware of its health benefits and are becoming more health conscious.

Looking at the supply aspect of the question, you could say that rice is a heavily subsidized good, as it is a part of the staple diet for many South East Asian countries. So, more subsidies mean more rightward shifts (increases) in the supply curve, which leads to a fall in the price.

Obviously, don't forget to draw the diagram for both situations.

Hope this helps!!!

 

[EconDaddy]

Hi,

I think Vighnesh gave a great answer, but there is a bit more I would add:

The question asks you to explain how the price changes happen.

When there is an increase in demand (right shift of D), you'd explain that quantity demanded increases at every price, including the original equilibrium price. Thus, at that price now once the D curve shifted right, there is an excess demand (=shortage). When there is a shortage, producers start raising their price as they can earn more profit at higher prices. As P increases (movement up on S curve), due to the law of demand, the quantity demanded falls (this is a movement upwards on the new demand curve). The P will keep increasing until the shortage is cleared at the new (higher) equilibrium price.

When there is an increase in supply (right shift of S), you'd explain that quantity supplied increases at every price, including the original equilibrium price. Thus, at that price now once the S curve shifted right, there is an excess supply (=surplus). When there is an excess supply, producers start cutting their price as they need to get rid of the products that nobody was buying from them. As P decreases (movement down on the new S curve), due to the law of demand, the quantity demanded increases (this is a movement downwards demand curve). The P will keep decreasing until the excess supply is cleared at the new (lower) equilibrium price.

Also, don't forget to use examples while you're explaining the determinants and how they work.

 

Thanks,

EconDaddy
IB Economics teacher, examiner and tutor
www.econdaddy.com