The Law of Demand and Supply

The Law of Demand and Supply

Question 1

The law of supply states that; all factors held constant, as the prices of goods or services increase, the quantity of the said goods or services supplied will increases, and vice versa. Suppliers increase the quantity of goods and services supplied as prices rise to take tap into increased profits. As businesses expect more profits, they are likely to produce more to rake in more revenue.

Question 2

The law of demand, a fundamental economic concept, avers that price and the quantity demanded have an inverse relationship. In other words, the higher the cost of goods or services, the lower the quantity ordered. Such is a result of the diminishing marginal utility, implying that consumers use the initial units of an economic good to satisfy their most urgent needs, with the excess units being used to fulfill lower-valued needs.

Question 3

Determinants of supply are the factors other than price that cause a change in the quantity supplied. These factors cause a shift in the supply curve rather than a movement caused by price changes. Determinants of supply include;

1. The production cost- Since the primary objective of most private enterprises is profit maximization, an increase in production cost lowers the quantity of goods supplied.
2. Technology-Advanced technology reduces production costs, thus enhancing supply.
3. The number of sellers-The more the sellers, the higher the quantity supplied and vice versa.
4. Future price expectations-Suppliers withhold inventory if they expect a price increase in the future.

Question 4

1. Price of the product- If other factors remain constant, price is a permanent parameter to make purchasing decisions.
2. Consumer Income- As consumer income increases, they are likely to demand more.
3. Consumer Expectations-If consumers expect a price increase in the future, they will demand more now.
4. The number of buyers in the market-The more the buyers, the higher the quantity of goods likely to be demanded.

Question 5

The equilibrium is simply the point where the demand curve and the supply curve intersect. Therefore, given a supply and demand curve, the exact point of intersection is equilibrium. Also, given the supply and demand schedule table, the equilibrium is whenever the quantity supplied is equal to the quantity demanded.

Question 6

Once Joshua receives an income increment, he will have more disposable income to spend. That means he will demand more of the goods/services in the demand and supply graph. Besides, the increase in demand will cause an outward shift of the demand curve.

Question 7

A tax credit will increase the amount of disposable income in the hands of consumers. That means they will demand more, something that will cause an outward shift of the demand curve.

Question 8

A reduction in subsidies will lead to a price increase for agricultural products. All other factors held constant, and suppliers will supply lesser quantities of the goods, which will lead to a downward movement of the supply curve.

Question 9

An increase in tastes will increase the quantity of goods demanded, leading to an outward shift of the demand curve. On the other hand, a reduction in taxes will reduce the production cost, which means suppliers will supply more, leading to an outward shift of the supply curve.

Question 10

If input costs go up, it will lead to a rise in production costs which will eventually lead to a reduction in supply. This will lead to a downward shift in supply. On the other hand, a drop in income will reduce disposable cash, thus reducing the quantity demanded. Price remains constant in both instances.

Reference

Arnold, R. (2019). MACROECONOMICS (Thirteenth Edition, pp. 41–57). Cengage.

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Your task is to complete all assigned questions to the best of your ability. Best of luck!
1. In two or more sentences, define the Law of Supply.
2. In two or more sentences, define the Law of Demand.
3. Identify at least 4 determinants of supply.
4. Identify at least 4 determinants of demand.
5. In two or more sentences, explain how the equilibrium point is determined.
The graph below was constructed by using the values in the table as references.

Quantity Demanded Quantity Supplied Price
110 10 1
100 20 2
90 30 3
80 40 4
70 50 5
60 60 6
50 70 7
40 80 8
30 90 9
20 100 10
10 110 11
6. If Joshua has an increase in income, would the supply curve or demand curve shift, and in which direction, or would there be movement along the demand curve? Please explain in one to two sentences.
7. If taxpayers are given a tax credit for the purchase of electric automobiles, please illustrate on the graph given below a shift in the supply or a shift in the demand curve for electric automobiles. Please state whether the price will increase or decrease and whether the quantity will increase or decrease.

8. If agricultural subsidies were cut, please illustrate on the graph below the direction or movement of the supply or demand curve. Please state whether the price will increase or decrease and whether the quantity
will increase or decrease.

9. If tastes increase and taxes decrease, please illustrate the direction or movement of the supply and demand curves and state whether the price will increase, decrease, or remain at the same level and state whether quantity will increase, decrease, or remain at the same level.

10. If input costs decrease and income decreases by the same proportion, please illustrate the direction or movement of the supply and demand curves and state whether the price will increase, decrease, or remain at the same level and state whether quantity will increase, decrease, or remain at the same level.