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Difficulty: HardDeterminants and Changes in Demand

In a Nigerian urban market, a fall in the price of Liquefied Petroleum Gas (LPG) leads to a decline in household purchases of Kerosene stoves, even though the price of Kerosene stoves remains unchanged at N25,000\text{N}25,000. Two months later, manufacturers reduce the retail price of Kerosene stoves to N20,000\text{N}20,000, causing the quantity of Kerosene stoves purchased by consumers to increase. Which of the following statements correctly distinguishes the economic changes occurring in the market for Kerosene stoves during these two events?

  1. The first event illustrates a leftward shift of the demand curve caused by a fall in the price of a substitute, whereas the second event illustrates a movement along the demand curve caused by a change in own price.Answer
  2. B
    The first event causes an upward movement along the demand curve for Kerosene stoves, whereas the second event shifts the demand curve outward to the right.
  3. C
    The first event illustrates a leftward shift of the demand curve because LPG and Kerosene stoves are in complementary (joint) demand.
  4. D
    Both events illustrate shifts in the demand curve for Kerosene stoves resulting from changes in consumer purchasing power.

Answer

The first event illustrates a leftward shift of the demand curve caused by a fall in the price of a substitute, whereas the second event illustrates a movement along the demand curve caused by a change in own price.
Non-price determinants, such as the price of substitute goods (LPG), cause the entire demand curve for Kerosene stoves to shift leftward when the substitute becomes cheaper. In contrast, a change in the price of Kerosene stoves itself causes a movement along its existing demand curve (an expansion of quantity demanded).

Step-by-Step Solution

1
Analyze Event 1 (Effect of LPG price fall on Kerosene stoves market)
LPG and Kerosene stoves are substitute goods in competitive demand. A fall in the price of LPG makes LPG relatively cheaper, inducing consumers to switch away from Kerosene stoves. Because the price of Kerosene stoves remained constant while consumption fell, this represents a decrease in demand (a leftward shift of the demand curve).
Non-price determinants such as prices of substitute goods shift the entire demand curve.
2
Analyze Event 2 (Effect of Kerosene stove price reduction from N25,000 to N20,000)
The price reduction of the commodity itself from N25,000\text{N}25,000 to N20,000\text{N}20,000 leads to a higher quantity purchased according to the Law of Demand. This change in quantity demanded is represented by a movement down along the existing demand curve.
Changes in a commodity's own price alter the quantity demanded along the curve rather than shifting the curve.
3
Synthesize and match with the correct option
Event 1 is a shift of the demand curve (change in demand) due to a substitute's price change, while Event 2 is a movement along the demand curve (change in quantity demanded) due to an own-price change.
This directly matches the true economic distinction between a shift of a curve and a movement along a curve.

Key Concept

Distinction between Change in Demand (curve shift due to non-price determinants) and Change in Quantity Demanded (movement along curve due to own-price change)
Estimated Time:2m 0s
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Topics

Determinants and Changes in Demand

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