Demand, Supply and Elasticity: Question 1

Worked solution

Step 1: Recall the distinction between a movement and a shift

A movement along the demand curve happens only when the price of the good itself changes, buyers simply move to a different point on the same curve. A shift of the demand curve happens when any non-price determinant of demand changes instead, for example income, the price of a substitute or complement, tastes, population, or expectations of future prices, so that a different quantity is demanded at every price, not just at one.

Step 2: Check option A

In option A, the rental company changes the price of the good itself, its own daily rental price, from $5 to $8. This is exactly the kind of change that produces a movement along the existing demand curve for bike rentals, not a shift of it.

Step 3: Rule out options B, C and D

• Option B: a rise in average student incomes is a change in income, a non-price determinant of demand. Since daily bike rental is likely a normal good for most students, this would shift the demand curve to the right (demand increases at every price).
• Option C: a fall in the price of bus tickets is a change in the price of a substitute good, not the price of bike rental itself. A cheaper substitute makes bike rental relatively less attractive, shifting the demand curve for bike rentals to the left (demand decreases at every price).
• Option D: a cycling-safety campaign changes tastes and preferences in favour of cycling, another non-price determinant. This shifts the demand curve for bike rentals to the right.

In each of B, C and D, the rental price of a bike itself never changes, only some other factor does, so all three shift the curve rather than producing a movement along it.

Final answer

Option A. Only a change in the rental price of the bikes themselves causes a movement along the demand curve; B, C and D are all shifts caused by non-price determinants (income, the price of a substitute, and tastes).