ELEMENTS OF DEMASND AND SUPPLY
Elements of Demand and SupplyEvery economy must somehow the three basic economic problems: what should be produced, how goods and services should be produced, and for whom are the goods and services produced. Hence, every economy must make decisions, and mostly it relies on the market system and price. The operation of demand and supply is the answer to the three basic is the answer to the three basic economic problems. In a market economy, prices of goods and services are determined by the interaction of demand and supply.DemandIt refers to the number or amount of goods and services desired by the consumers. The quantity demanded is the amount of goods or ...view middle of the document...
They are related in such a way than an increase in the price of one good will cause an increase in the demand for the other or vice-versa.b. Complementary goods are goods that go together. They are related in such a way that an increase in the price of one good will cause a decrease in the demand for the other good.5. Consumer’s Tastes and Preferences. An increase in the preference and taste for a certain good will certainly increase the demand for that particular good.6. Population. An increase in the population means more demand for goods and services. Inversely, less population means less demand for goods and servicesDemand ScheduleIt is the relationship between the quantity of a good demanded and the price of that good. Other factors that may affect the quantity demanded, such as the prices of others goods are held constants in drawing up the demand schedule. Price (‘000) | Quantity Demanded |
1 | 1000 |
2 | 800 |
3 | 600 |
4 | 400 |
5 | 200 |
Demand Curve The demand curve shows graphically the relationship between the quantity of a good demanded and its corresponding, with other variables. The demand curve is typically downward sloping. It describes the negative relation between the price of a good and the quantity that consumers want to buy at a given price.Law of DemandThe law of demand states that as prices increases, quantity demanded decreases; and as prices decreases, quantity demanded increases, if other assumptions remain constant.Validity of Law Of DemandThe law of demand is only true if the assumption of ceteris paribus is applied or other determinants remain constant that is, there is no change and movement in income or population. Income effect. When the price of goods decreases, the consumer can afford to buy more of its or vice-versa. This simply implies that at a lower price, the consumers have a greater purchasing power. Substitution Effect. It is expected that consumers tend to buy goods with a lower price. They look for substitutes with a lower price.Changes Involving Demand Change in Quantity Demanded (movement along a demand curve). It indicates movements from one point to another point of the same demand curve. Change in Demand (Shifting from one demand curve to another demand curve). This is brought about by the changes in all determinants of demand except price. SupplyIt is defined as the maximum units/ quantity of goods and services producers can offer. The quantity supplied refers to the amount or quantity of goods and services producers are willing and able to supply at a given price, at a given period of time.Determinant of Supply1. Changes in Technology. State of the art technology that uses high-tech machines increases the quantity of supply of goods which causes the reduction of cost of production.2. Costs of Inputs Used. An increase in the price of an input or the cost of production decreases the quantity supplied because...