Question

a. Critically analyze the factors that will affect or impact Demand and Supply.

b. Critically analyze the factors that will affect or impact Aggregate Demand and Aggregate Supply.

Answer 1

Ans (A) Factors impact the demand:

• Price of substitute goods: A rise in price of substitute goods will cause an increase in demand for own good.
• Price of complement goods: A rise in price of complement good will cause a decline in demand for own good.
• Income of the consumers for normal goods: An increase in income increases the demand for normal goods
• Income of the consumers for inferior goods: An increase in income decreases the demand for inferior good.
• Taste and preferences of consumers: A favourable taste and preferences increases the demand for the good.

Factors impact the Supply:

• A decrease in costs of production. This means business can supply more at each price. Lower costs could be due to lower wages, lower raw material costs
• More firms. An increase in the number of producers will cause an increase in supply.
• Investment in capacity. Expansion in the capacity of existing firms, e.g. building a new factory
• Related supply. An increase in supply of a related good e.g. beef and leather
• Weather. Climatic conditions are very important for agricultural products
• Technological improvements. Improvements in technology, e.g. computers or automation, reducing firms costs.
• Lower taxes. Lower direct taxes (e.g. tobacco tax, VAT) reduce the cost of goods.
• Government subsidies. Increase in government subsidies will also reduce the cost of goods, e.g. train subsidies reduce the price of train tickets.

Ans (B) Factors impact the aggregate demand:

• Household spending: If household spending rises, the aggregate demand rises.
• Investment spending: If firms increases investment spending, then aggregate demand rises
• Government spending: An increase in government spending increases the aggregate demand
• Net exports: If the net exports rises, aggregate demand also rises.
• Increase in money supply also increases the aggregate demand

Factors impact the aggregate supply:

• An increase in the price of inputs causes negative aggregate supply shock which shifts the aggregate supply curve to left.
• Increase in labor efficiency will increase the aggregate supply in the economy
• A positive technological change would cause the producers to produce more and aggregate supply rises.