Tutorial 2

Aiman Ahmed S072897 ECO103
Tutorial 2
1. Demand is defined as a desire backed by willingness and ability to pay for goods and services.
Factors which affect the shift of demand include:
 Number of potential buyers
Increase in number of potential buyers increases the demand causing demand curve to
shift to the right, and vice versa.
 Income or wealth
Income is the amount of money received or earned each year from working, interest on
savings, and other sources such as gifts.
Wealth is the value of accumulated past savings, including human wealth.
 Price of related goods
Substitute goods can be used in place of each other. An increase in price of one raises
demand for the other.
Complementary goods tend to be together. An increase in price of one causes fall in
demand for the other.
 Tastes
Taste (or preferences) are people’s underlying likes and dislikes. Anything that causes a
shift in tastes toward a good will increase demand for that good and shift its demand
curve to the right.
2. The law of demand states that an increase in the price of a good will reduce quantity demanded
of that good, given that other conditions affecting demand remains constant. Movement along
the demand curve occurs due to a change in the price of the product.
3. Supply is defined as quantity of goods supplied at a given price over given period of time.
4. Factors affecting supply include:

 Price of inputs
A fall in the prices of inputs—materials, energy, natural resources, wages etc.— makes
production more profitable at each output price, so firms supply more at each price, and
supply curve shifts to right.
 Technology
Technology determines how much inputs are required to produce a unit of output. be
used in place of each other. For example, if a new technology reduces the cost of
gaming console production for manufacturers, according to the law of supply, the
output of consoles will increase.
 Number of potential sellers
An increase in the number of sellers increases the quantity supplied at each price, shifts
Supply curve to the right.
 Price of related goods
The Supply of a good can be influenced by the price of related goods. These are other
goods a firm can produce using the same resources. An increase in the price of a
substitute in production lowers the supply of the good because the opportunity cost is
higher.
Eg: Fasmeeru
5. From the demand side, crude oil is used as a raw material in the production of petroleum. A rise
in the price of crude oil may indicate a rise in the price of petroleum. Since petroleum and cars
are complementary goods, a rise in the price of petroleum could mean a fall in the demand for
cars.
From the supply side, different grades of oil may be used in different processes involved in the
manufacture of cars. For instance, oil may be used in the plants for the operation of
machineries. Oil may also be used in the paint used to make the cars look sleek and attractive.
Therefore, a rise in the price of crude oil may indicate a rise in the price of all of these oil-based
raw materials. Therefore, it could lead to increased cost of production and hence, supply of cars
may decrease.
Before price of crude oil changed, the equilibrium price P1 and equilibrium quantity Q1 were
determined by the market supply curve S1 and market demand curve D1.
The rise in price of crude oil shifts the demand curve to the left to D2 and the supply curve to
the left to S2. Although the price shows no change, the quantity offered by suppliers and bought
by consumers has decreased to Q2.
While a fall in the demand for cars would cause price to fall, a fall in supply would cause the
price to rise.
Therefore, question whether the price would rise or fall depends on the extent to which the
demand and supply would fall.
6. Income elasticity of demand refers to the sensitivity of the quantity demanded for a certain
good to a change in real income of consumers who buy this good, keeping all other things
constant.
Normal good is any good for which demand increases when income increases, i.e. with a
positive income elasticity of demand. Cars that are not luxurious fall under this category.
A luxury good (or upmarket good) is a good for which demand increases more than
proportionally as income rises, so that expenditures on the good become a greater proportion
of overall spending. Luxury goods are in contrast to necessity goods, where demand increases
proportionally less than income. Examples of these include sports cars, performance cars that
only the rich people would use.
7. Any equipment used by an organization to produce other commodities.

If the price of inputs increases the supply curve will shift left as sellers are less willing or able to
sell goods at any given price. Inputs include land, labor, energy and raw materials.
In this example we can see that after the prices rise, the number of cakes consumed increases.

Tutorial 2

Uploaded by

Copyright:

Available Formats

Tutorial 2

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Tutorial 2

Uploaded by

Copyright:

Available Formats

Aiman Ahmed S072897 ECO103

4. Factors affecting supply include:

7. Any equipment used by an organization to produce other commodities.

You might also like

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.