Unit 2 Assignment – Law of Supply and Demand (Assessment for CLO 3) - (Due Sunda

Question

Unit 2 Assignment – Law of Supply and Demand (Assessment for CLO 3) - (Due Sunday, Sept. 16th)

Estimated time to complete: 5 hours

Instructions

The law of demand states that as prices increase the quantity demanded decreases. The law of supply states that as prices increase the quantity supplied increase. Using these two laws please answer the following questions:

Explain how changes in prices result in a downwards sloping demand.

Explain how changes in prices result in an upward sloping supply.

What will happen when consumer demand equals producer supply?

Make certain that you include in your explanation the concept of market equilibrium.

Explanation / Answer

Ans. That's an interesting question , let's start answering :

PART 1 . Downward sloping of demand curve indicates that as Price for a good decreases , Quantity demanded for that product increases and vice versa. This means that there is an inverse relation between Price and Quantity Demanded. This downward sloping( increase in price and decrease in Q.D ) can be explained by following factors.

1) Law of Diminishing Marginal Utility - The law states that when consumption of a commodity increases, Marginal utility of each successive unit starts falling. Thus consumer is willing to pay less price.

2) Substitution Effect - It refers to substitution of one good for another. For example Tea and Coffee , If Prices of Tea goes down it becomes relatively cheaper as compare to Coffee . Thus demand for Tea Rises.

3) Size of Consumer Group - When Price of any commodity falls , many consumers can afford to buy it. Thus demand increases.

4) Income Effect - When Price of a Commodity Decreases , Real Income of the Person Increases with respect to that good. Thus demand Increases.

Hence these points clearly shows , how does Demand Curve slopes downward when Price of goods changes.

PART 2. We all know that Theory of Supply states that other things remaining constant, when Price of a commodity increases , Quantity Supplied of that commodity also increases. This means that Price and Quantity Supplied have positive relation thus Supply Curve is Upwards Sloping.. Now let us understand this with some points :

1) When other things remain constant, Higher Price means Higher Profit for the Suppliers. Thus the Producer is induced to Produce more and more commodities. Hence , Supply Increases.

2) When Supply is increased , it occurs under the Law of Dimnishing Returns. When output increases , Marginal Cost also increases . Thus , the Price must rise if there is increase in Supply.

PART 3. When Consumer Demand is equal to the Supply of the Producer , it implies the attainment of Market Equilibrium. In this situation , there is neither excess demand and neither excess supply. Producers are willing to supply the same amount of goods that Consumers are Demanding. Price at this situation is known as Equilibrium Price and Quantity known as Equilibrium Quantity.

This also implies , that at a particular constant Price , Consumer Demand is Equal to Producers Supply. Thus a Situation of Equilibrium is achieved in the Market.

I hope you understood the answer , Do ask in case of any doubts.

Best of Luck !! Keep Chegging !!

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.