Question

Please answer the following - Economics review

1.    What does the law of demand states?

2.    What is a normal good? What is the impact of an increase or decrease in income on the demand on normal goods?

3.    Why does the quantity demanded go down when the price of a good increase?

4.    What are surplus and shortage in the market?

5.    What are the factors that shift the demand and supply curves?

6.    What is a market equilibrium?

7.    When you draw a demand curve which factors held constant which factor not held constant?

8.    What is the law of supply?

9.    If the supply of a product decreases and the demand for that product simultaneously increases, what would happen to the equilibrium price and quantity?

10. What is the impact of an increase in the wage of workers (one of the inputs of production) on the supply curve?

11. What is the impact of an increase in the price of a substitute on the demand curve?

12. What is the impact of a decrease in the price of a complement on the demand curve?

13. What is complement good? What is a substitute good?

14. What is the difference between a movement along the demand curve and change/shift in the demand curve?

Answer 1

1.    What does the law of demand states?

The law of demand states, that other factors such as technology & tastes and preferences of the consumer being constant, the demand and price of a good are inversely related to one another.

This happens, because at a lower price, the consumers can buy more quantity of the products due to the budget constraint whereas at a higher price they cannot purchase the items in higher quantity because of the limitation of the total money available.

2.    What is a normal good? What is the impact of an increase or decrease in income on the demand on normal goods?

A normal good is one, the demand for which reduces with an increase in the price as explained in question 1 and when the price falls the demand for the good increases.

The impact of an increase in income on normal goods is such that people can now spend more money in buying the product and therefore since the availability of capital changes, the overall demand for the commodity also rises respectively.

3.    Why does the quantity demanded go down when the price of a good increase?

People have limited resources to purchase a commodity. Therefore, when price of a good increases the amount of money which an individual can spend on the good reduces.

Example: - If I had 10$ in my pocket and the price of a burger was 1$ I could buy 10 with the money I had. Similarly if the price went up to 2$ I would only be able to purchase 5$ because my pocket only allows me to spend 10$.

Therefore the purchasing capacity of the buyer changes, when there is an increase in the price of the commodity thus causing a reduction in demand.

4.    What are surplus and shortage in the market?

A surplus in the market indicates that the quantity supplied for the product is more than the quantity demanded. At this point, the commodity tends to be sold at a lesser price because of sluggish demand.

A shortage in the market indicates that the quantity demanded is more than the quantity supplied. In this condition a seller may be able to command a higher price for the commodity since people demanding are more.

(5) What are the factors that shift the demand and supply curves?

Demand and supply curves shift because of reasons other than the price of the commodity itself. These reasons include but are not limited to the following factors.

• Changes in Income Patterns of people. As explained above, income may lead to rise or fall of demand as the purchasing power of people changes. Thus leading to a shift in the demand curve respectively.
• Tastes and Preferences of the Consumers. This can also lead to a change in demand or supply depending upon how the consumer’s fresh desires are.
• Technological Changes can also lead to change in demand and supply patterns allowing for producers to produce more, consumers to demand more or vice versa.

Question 6 what is a market equilibrium?

A market is said to be in equilibrium when quantity demanded for a product at a particular price is equal to the quantity supplied of the product at that price.

Basically when this happens, the interests of both the consumers and the producers gets maximized. In real life even though this is hypothetical and is hardly found across any industry, it refers to a situation wherein customers get maximum satisfaction and producers earn maximum profits respectively.

Q7.) When you draw a demand curve which factors held constant which factor not held constant?

When we draw a demand curve, the various price levels are considered constant whereas the factors which are not held constant are as explained above:-

• Changes in Income Patterns of people.
• Technological Changes
• Tastes and Preferences of the Consumers

Question 8 what is the law of supply?

The law of supply is just the exact opposite of the law of demand. The law of supply states that as the price of a commodity increases, the producers increase the supply of the product since they want to maximize their profits respectively.

At a higher price, the producer gets and is able to generate a higher revenue therefore a producer will always try to sell the products at the maximum price which the consumer is ready to pay for the same.

9.    If the supply of a product decreases and the demand for that product simultaneously increases, what would happen to the equilibrium price and quantity?

If supply of a product were to decrease and the quantity demanded for it would increase, the resultant would be a rise in the equilibrium price and quantity.

The quantity is already increasing as described by the example and at this stage if the quantity supplied falls, the equilibrium price would rapidly rise since producers would start charging a premium to maximize their profits respectively.

10. What is the impact of an increase in the wage of workers (one of the inputs of production) on the supply curve?

The impact of an increase in the wages of workers is that the supply of the commodity at same price levels shrinks. This is also referred to as a shift in the supply curve.

When this happens, at the same price levels the supplier can no longer produce same levels of products because of increased costs.

This is also called left shift of the supply curve since change in supply is caused by factors other than the price of the commodity respectively.

11. What is the impact of an increase in the price of a substitute on the demand curve?

If price of a substitute of the product increases, more people tend to buy the product at the same price levels. This is also known as shift of demand curve which increases the demand and therefore, the demand curve shifts to the right indicating an increase in overall demand of the commodity respectively. Examples of substitute goods are tea & coffee.

12. What is the impact of a decrease in the price of a complement on the demand curve?

The exact opposite happens in case of compliment goods since the demand for these products are interconnected with one another.

When the price of a compliment good decreases, the demand curve for the product itself shifts to the left indicating that the quantity demanded decreases even when the prices are the same.

Examples of complimentary goods include Car & Petrol.

13. What is complement good? What is a substitute good?

A compliment good is one the demand for which is directly related to the demand of the other product. As explained above, the examples of these goods are Car & Petrol. When the demand for car increases the quantity demanded for petrol also increases and vice versa.

A substitute good on the other hand is inversely related to the demand for other product. Example for this is tea & coffee. When price of tea rises the quantity demanded for coffee increases and vice versa.

14. What is the difference between a movement along the demand curve and change/shift in the demand curve?

Movement along the demand curve happens only due to price of the commodity. It is a change therefore which occurs on the same demand curve.

On the other hand a shift in the demand curve may happen due to reasons stated in above questions respectively. It happens independent of the price of the commodity due to factors such as technology, change in prices of substitutes, complimentary goods or technological changes respectively.

Please feel free to ask your doubts in the comments section if any.