Question.3108 - Demand and Supply
Answer Below:
The law of demand states that given all other things remaining same, as the price of a commodity/service increases, the quantity demanded for that quantity decreases. In other words, there is an inverse relationship between the price of a product and its quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. For example: If the price of a particular shirt increases, the number of shirts demanded by the consumers would decrease. Situation I: Price of the shirt – USD 30; Quantity demanded – 100 pieces. Situation II: Price of the shirt – USD 60; Quantity demanded – 50 pieces. This can be demonstrated graphically as under: The other things that should remain same are the following: ? Habits, tastes and fashions ? Income of the consumer ? Price of related goods ? Number of buyers The law of supply states that given all other things remaining same, as the price of a commodity/service increases, the quantity supplied also increases. In other words, there is a direct relationship between the price of a product and its quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue. For example: If the price of a particular shirt increases, the number of shirts supplied by the manufacturer would decrease. Situation I: Price of the shirt – USD 30; Quantity supplied – 100 pieces. Situation II: Price of the shirt – USD 60; Quantity demanded – 200 pieces. This can be demonstrated graphically as under: The law of demand and supply impacts our purchasing decisions on a day-to-day basis. For example, I would like to buy an extra pair of Nike shoes if I find that the prices have now been reduced or I would like to take my friends out to McDonalds more often if I found that the price of a burger has now been reduced. Looking at it numerically, I would like to highlight the following example: Scenario 1: My budget for my birthday party is USD 100. I decide to take 10 of my friends out to McDonalds. Each burger costs me USD 10. So I can go out with friends only once. Scenario 2: My budget for my birthday party is still USD 100. However, the cost of each burger has now reduced to USD 5. This means that I can now either go out with my friends twice or take 20 friends out for the party. Therefore, we see that the relationship between price of burger and quantity demanded for burger is inverse.More Articles From Economics
.ico)
.ico)
.ico)
.ico)
