Question

1. Discuss the following questions:

(a) State the key determinants of demand and supply

(b) Explain the steps to analyse the change in demand and supply and effect on equilibrium.

(c) What does the “invisible hand” refer to in the fre market econmy.

Answer 1

a) Key determinants of demand are:-

• Normal Goods- When there will be an increase in the consumer’s income, there will be an increase in demand for a good and if the consumer’s income will fall then, there will be a fall in demand.
• Change in preferences- when there will be a change in consumer's preferences, there will be a change in demand too. for example people are preffering organic products therefore the demand for organic products will increase.
• Complimentary Goods- They are the goods people usually buy together, like bread and butter, tea and milk. When there would be decrease in the price of compliments, then the demand for its compliments will increase
• Sunstitutes- Substitutes are goods that cutomers can buy in place of the other like how Coca-Cola & Pepsi are very close substitutes. So increase in the price of substitutes will definetely affect the demand curve.

Key determinants of Supply are:-

• Improved technology- An improvement or increased technology can reduce the need for factors of production in supplying a product of good.
• Prices of other goods- It can also affect the production of any one good like if a business can produce more than one type of product with its equipment and labor, then it will tempted to produce more of those things for which it receives a higher profit and less of the other things.
• Number of sellers- It will have an effect on the market supply as the market supply is simply the sum of the supply of each individual seller, more sellers entering the market increases supplies while departs sellers decreases supply.
• Expected prices- It can change the present supply, as because if suppliers believe that prices will decrease in the near future, they might try to sell all that they have presently.