Match each economic event affecting the market for Liquefied Petroleum Gas (LPG cooking gas) on the left to its corresponding geometric effect on the LPG demand curve on the right.
- A sharp rise in the retail price of LPG cooking gas itselfAn upward movement (contraction) along the existing demand curve
- A steep increase in the market price of substitute cooking fuels (kerosene and electric cookers)An outward (rightward) shift of the demand curve driven by substitute price changes
- A major fall in average real household disposable income (assuming LPG is a normal good)An inward (leftward) shift of the demand curve caused by reduced purchasing power
- An announcement that LPG prices are expected to double next weekAn outward (rightward) shift of the current demand curve driven by consumer expectations
Answer
The correct matches pair: (1) Price change of LPG itself to an upward movement along the existing demand curve; (2) Price increase of substitute fuels to an outward rightward shift driven by substitute price changes; (3) Fall in household disposable income to an inward leftward shift caused by reduced purchasing power; and (4) Expectation of future price increase to an outward rightward shift driven by consumer expectations.
Price changes of the product itself move consumers along the existing curve (contraction or expansion), while non-price determinants (substitute prices, income, and buyer expectations) shift the position of the demand curve.
Step-by-Step Solution
Key Concept
Distinction between movement along a demand curve (change in quantity demanded) and shifts of the demand curve (change in demand) driven by non-price determinants.