Explain the laws of Supply and Demand; distinguish between shifts in each, from a movement along its curve, then explain how the laws of supply and demand generate equilibrium. What are the limitations of supply and demand analysis?
Please see the attached file for complete details as graphs used may not print here.
Law of Demand
When price of a good or service is increased (other things remain constant), buyers tend to buy lesser amount of good or service. Similarly, when price is lower, buyers tend to buy more of it other things being constant. Quantity demanded and price of product have inverse relationship. Some of other things which are assumed to be constant are as under:
1. Taste and Preferences of consumers
2. Income level of consumers
3. Prices of related goods
4. Future expectations about product's prices
5. Market size
Quantity demanded tends to fall as price increases because of
Substitution effect: People tend to substitute one product with other cheaper products. People may substitute chicken with beef if price of beef increases.
Income effect: As price of one good increase, real income seems to be decreasing. So, people tend to consume less of it.
Law of Supply
Supply of good or service is defined as the quantities of good or service that people are ready to sell at ...
Solution describes the laws of demand and supply. It also distinguishes between movement along curve and shift of curve. Concepts are explained with the help of suitable graphs.