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Demand, Supply and How Markets Work: Question 4

Syllabus 2.1, 2.2, 2.3

Multiple choice 1 mark

A government introduces a subsidy paid to bicycle helmet manufacturers for every helmet they produce. At the same time, and completely separately, a national road-safety campaign successfully persuades many more cyclists that wearing a helmet is important, at every possible price of a helmet.

Which combination of changes would these two events cause in the market for bicycle helmets?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Analyse the subsidy, a supply-side event

A subsidy paid to manufacturers lowers their cost of production for every helmet made. Lower costs make helmet-making more profitable at every price, so manufacturers are willing and able to supply more helmets at every price than before. This is a non-price determinant of supply, so the supply curve shifts to the right.

Step 2: Analyse the safety campaign. A demand-side event

The road-safety campaign changes cyclists’ tastes and preferences: more of them now want to buy a helmet at every possible price, simply because they value wearing one more highly than before. This is a non-price determinant of demand, so the demand curve shifts to the right.

Step 3: Combine the two effects

Neither event is caused by a change in the price of a helmet itself, so neither is a movement along a curve. Both curves shift:

  • Supply curve: shifts right (subsidy lowers production costs).
  • Demand curve: shifts right (campaign increases desirability of helmets).

Step 4: Rule out the other options

  • Option B has demand shifting left, which would only happen if cyclists valued helmets less. The opposite of what the campaign does.
  • Option C has supply shifting left, which would only happen if production costs rose. The opposite of what a subsidy does.
  • Option D wrongly treats both events as price-driven movements, when both a subsidy and a change in tastes are non-price determinants that shift the curves.

Final answer

Both the demand curve and the supply curve for bicycle helmets shift to the right, option A.