Question

Please explain the law of demand and law of supply with your good examples. Also explain all the changes that happen to the equilibrium price and quantity with numeric examples, when,

a. Demand curve shifts (to right and left)

b. Supply curve shifts (to right and left)

c. Both demand and supply curves move to the right at the same time

d. Both demand and supply curves move to the left at the same time

e. Explain with example the difference between change in demand and change in quantity demanded.

Answer 1

Law of Demand states the inverse relationship between price and quantity demanded of a good, ceteris paribus. Keeping other things, such as income of consumer or price or related goods constant, if the price of Good X increases then its quantity demanded will fall and vice-versa.

Law of Supply states the direct relationship between price and quantity demanded of a good, ceteris paribus. Keeping other things, such as technology or government policies constant, if the price of Good X increases then its quantity supplied will rise and vice-versa.

For example, if the price of Ice-Cream rises, then it becomes costly for the consumer to purchase it. Hence, the quantity demanded will decrease. However, a fall in the price of Ice-cream works in favor of the producer as he can get more revenue now. So, the quantity supplied will increase.

a.

A rightward shift in the demand curve will increase both the equilibrium quantity and equilibrium price. However, a leftward shift will lead to fall in both equilibrium price and quantity.

b.

A rightward shift in the supply curve will lead to fall in the equilibrium price and rise in the equilibrium quantity

A leftward shift will increase the equilibrium price and a fall in the equilibrium quantity.

c.

If both demand and supply curves move to the right then equilibrium quantity will increase. However, there would be an ambiguous impact on the price.

If the change in supply = change in demand, then equilibrium price remains the same.

If the change in supply > change in demand, then equilibrium price falls

If the change in supply < change in demand, then equilibrium price will increase.

d.

If both demand and supply curves move to the left then equilibrium quantity will fall. However, there would be an ambiguous impact on the equilibrium price.

If the change in supply = change in demand, then the equilibrium price remains the same.

If the change in supply > change in demand, then equilibrium price will rise

If the change in supply < change in demand, then equilibrium price will fall.

e.

Change in demand happens when there is a shift in the demand of a good and the price level remains the same. For example, an increase in the income of the consumer may lead to rightward shift in the demand curve.

Change in quantity demanded happens when there is a change in the price level. There will be either an upward or a downward movement along the same demand curve. Other factors such as income, price of related good remains same. For example, an increase in the price of Ice-cream will lead to an upward movement along the demand curve. This is called demand contraction

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