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Law of demand and supply, determinants, and market equilibrium.
The law of demand and supply is a fundamental concept in economics that explains how prices are determined in a market economy. The law states that the price and quantity of a good or service will adjust to equilibrium, where the quantity demanded equals the quantity supplied. Understanding the determinants of demand and supply is crucial for businesses and policymakers to make informed decisions.
The law of demand states that, other things being equal, as the price of a good increases, the quantity demanded decreases. The determinants of demand are factors that affect the quantity of a good or service that consumers are willing and able to buy at a given price level. These include income, prices of related goods, consumer expectations, population size, and preferences.
The law of supply states that, other things being equal, as the price of a good increases, the quantity supplied also increases. The determinants of supply are factors that affect the quantity of a good or service that producers are willing and able to sell at a given price level. These include production costs, technology, expectations, government policies, and resource availability.
A demand curve is a graphical representation of the relationship between the price of a good and the quantity demanded. It slopes downward from left to right, indicating that as the price increases, the quantity demanded decreases. The shape and position of the demand curve are influenced by the determinants of demand.
A supply curve is a graphical representation of the relationship between the price of a good and the quantity supplied. It slopes upward from left to right, indicating that as the price increases, the quantity supplied also increases. The shape and position of the supply curve are influenced by the determinants of supply.
Market equilibrium occurs when the quantity demanded equals the quantity supplied at a given price level. This is represented graphically by the intersection of the demand and supply curves. The market equilibrium price and quantity are determined by the interaction of the determinants of demand and supply.
A change in market equilibrium can occur due to changes in the determinants of demand or supply. For example, an increase in income can shift the demand curve to the right, leading to a new market equilibrium with a higher price and quantity traded. Similarly, an improvement in technology can shift the supply curve to the right, also leading to a new market equilibrium.
Understanding demand and supply is crucial for businesses, policymakers, and individuals making decisions about production, pricing, and investment. For instance, a company may use demand analysis to determine the optimal price for its product, while a government may use supply-side policies to stimulate economic growth.
Market failures occur when the market equilibrium does not lead to an efficient allocation of resources. Examples include externalities, public goods, and information asymmetry. These failures can result in inefficiencies, such as overproduction or underconsumption, which can be addressed through government intervention or regulation.
What is the relationship between the price of a good or service and its quantity demanded?
What happens to the quantity supplied as the price of a good or service increases?
At what point do the quantity demanded and quantity supplied equal each other?
What is the state where the quantity demanded equals the quantity supplied?
As the price of a good or service increases, what happens to its quantity demanded?
Discuss how changes in consumer preferences can affect the law of demand and supply. (20 marks) (20 marks)