Discussion Question in Macroeconomics: please hep me, I have to write Discussion

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Discussion Question in Macroeconomics:

please hep me, I have to write Discussion,

Thanks

Discuss the law of demand by giving examples. Why is the ceteris parebus assumption very important? What are the factors that affect quantity demanded? What are the factors that affect demand? What is the difference between a movement along and a shift of the demand curve? What is the difference between a change in supply vs. a change in quantity supplied? What factor(s) influence quantity supplied? Explain the mechanism at work for each What factors influence supply? Explain the mechanism at work for each. Once an equilibrium price is established, what happens when income increases? Will the equilibrium price increase or decrease? Describe the mechanism at work. What about the equilibrium quantity? What if the price of a complement (shoe laces, a good used in conjunction with another good) increases? Will the equilibrium price for the shoes (original good) increase or decrease? What about equilibrium quantity? What will happen when a price of a substitute in consumption increases, (say Pepsi) to the equilibrium price and quantity of Coca Cola? Explain normal and inferior goods by giving examples.

Explanation / Answer

(1)

Law of demand states that as price of a good changes, its quantity demanded changes in the opposite direction, ceteris paribus.

Ceteris paribus here means everything else remaining unchanged. Demand is not dependent on a sole factor (the price) but of several factors. If more than one factor changes, then law of demand may not hold. Therefore this assumption is so crucial.

(2)

The only factor affecting quantity demanded is the good's own price. As own price increases (decreases), quantity demanded decreases (increases).

(3)

Demand of a good depends on factors other than its own price:

a. Income.

As consumer income increases (decreases), a normal good's demand increases (decreases).

b. Related goods price.

An increase in price of a substitute will increase the good's demand, and an increase in price of a complement will decraese the good's demand.

c. Taste and preferences may change the demand.

d. Expectations about future price influences current demand.

(4)

When quantity demanded of a good changes caused by own price change, there is a movement along the demand curve (up or down). But when demand of the good changes caused by changes in other determinants, there is a shift (left or right) of the demand curve.

(5)

Change is supply is caused by factors other than the good's own price, and represents a shift in supply curve. A change in quantity supplied represents a movement along the supply curve, and is caused by a change in the good's own price.

(6)

Quantity suplied is solely dtermined by the good's own price. As price increases (decreases), by the law of supply, quantity supplied also increases (decreases).

(7)

Supply is determined by factors such as:

a. Input cost.

As input cost increases (decreases), producers are discouraged (encouraged) to supply at the prevailing price, since their cost of production increases (decreases). So, supply decreases (increases).

b. Factor availability.

If factors of production are not available at an optimal factor price, the cost of production will increase and the producer will supply less output, causing supply to fall.

c. Technology.

Availability of enhanced technology will reduce production cost and will encourage producers to supply more output.

NOTE: There are too many questions from which the first 7 have been answered.

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