Question

- explain in detail the law of supply, law of demand and market equilibrium through diagrams.

- critically analyze the shift of demand versus movement along a demand curve through diagrams.

Answer 1

a.

Since the law of demand stats that there is an opposite relationship between price and quantity demanded and other factors which affect the demand remains same. A numerical tabulation of this relationship is known as the demand schedule. The demand curve is the graphical representation of the law of demand. The demand curve is negatively sloped. The demand curve shows an inverse relationship between price and quantity demand.

Since the law of supply stats that there is a direct relationship between price and quantity supplied and other factors which affect the supply remains same.

The supply curve shows the direct relationship between price and quantity supplied. The determinants are;

Technology, costs of inputs and number of potential suppliers.

As it can be seen in the diagram that equilibrium quantity and price are determined by equality of demand and supply curve.

Equilibrium price is P*

Quantity is Q*

b.

In case of change in the quantity demand, there will be movement along the demand curve and in case of change in the demand, there will be shift of the demand curve.

Hence when price changes then there will be movement along the demand curve.

All this has been shown in the diagram.