Question

In: Economics

Explain the concepts below with the diagrams. • Law of demand • Law of supply

Explain the concepts below with the diagrams.
• Law of demand
• Law of supply   
• Show the equilibrium price and quantity
        


Solutions

Expert Solution

  • Law of Demand :

It basically states that keeping other things constant as the price will rise the quantity demanded will fall i.e. price and quantity have inverse relation for demand of a good

Assumptions - No change of taste or consumer preferences, income of consumer is constant, no change in custom, no substitute of that good,no change in price, no change in quality of product,habits of Consumer should be same,

Diagramatically - as shown above in law of demand diagram initally when price was at P2 i.e. lowest quantity demanded was at Q2 i.e. highest but soona as price rose to P1 quantity reduced to Q1 . Latter ,with more rise in price to P quantity dercreased to Q .

  • Law of Supply :

It basically states that with rise in price the quantity supplied will rise keeping other things constant i.e. there is direct relation in between price and quantity when it comes to supply

Assumption - cost of production is constant even when supply changes,no change in technique of production, transportation cost is same, no change in scale of production, government policies remain same,no future speculation in price

Diagramatically - as shown above when the price increases the quantity supplied also Increase . That is when price was P2 at lowest quantity supplied was also lowest at Q2 , when price rose to P1 so did quantity rose to Q2 and when price was highest at P quantity supplied was also highest at Q

  • Equibirium price and quantity:

When the quantity demand and quantity supplied will be equal at that point , one particular price is set and an equilibrium is established

Diagramatically - when supply and demand are drawn individually one price can't be decided thereafter, supply from producer's end and demand from consumer's end are shown by supply and demand curve respectively, when these interest that price and quantity, will be the equibirium price and quantity

As shown in above demand and supply intersected at point E , horizontally and vertically bringing equibirium price and quantity at P and Q.

Conclusion :

There can be shifts in demand and supply curve owing to various reasons, but just by law both are of opposite curves but forms the bases of market and economics


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