Law of Demand and Supply in Business Economics

This report discusses the law of demand and supply in business economics, focusing on Tesco as a case study. It explains the concepts of movement along the demand and supply curves, as well as factors causing shifts in these curves. The report emphasizes the importance of understanding these concepts for effective business management.

BM533: Contemporary
Business Economics

TABLE OF CONTENTS
INTRODUCTION.....................................................................................................................3
TASK 1......................................................................................................................................3
1.1 Law of demand..............................................................................................................3
1.2 Law of supply.................................................................................................................7
CONCLUSION.......................................................................................................................11
REFERENCES......................................................................................................................12

INTRODUCTION
The micro economics is an integral part of a business functioning as the
organizations takes decision pertaining to the propriate distribution of the resources.
It studies about the change in the decision making in regard to any change in the
economic factors. In this report, Tesco is taken as an organization which comes in
the top 4 retail giants all across the world. This report covers the basic knowledge in
relation to law of demand and supply and the various factor resulting into movement
and shift in the curves.
TASK 1
1.1 Law of demand
The law of demand basically refers to the economic function which accounts
for change in the demand of the products and services with respect to variation in
the price of the same. It is the fundamental principle which states that when the price
of the product increases then the demand of it declines and in case if the price
reduces then the demand of it increases (Hovakanyan, 2020). It has an inverse
relationship. In the below illustrated graph, it can be seen that the when the price of
the price of the product was at P1 quantity demanded was Q1 and when the price
declines to P2, and P3, the quantity demanded to the good increased to Q2 and Q3,
thus, showing an inverse relationship.
Movement along the demand curve
This refers to the movement in the quantity demanded of the products and
services on account of changes in the price of that product or services taking other
things to be constant. The movement is downward when there is a decrease in price

and upwards in case of rise in price. The below graph shows that when the price
increased from £10 to £12, it causes the quantity demanded fall from 55 to 40 units
resulting into contraction in demand. In other case, when the price falls from £10 to
£7, quantity demanded increased from 55 to 75 units leading to expansion in
demand.
Shift in demand curve
The shift in demand is generally caused because of the factors other than the price
of the product. There are mainly 5 factors which causes the sift a given below.
Increase in demand
When the demand of the product increases because of the factor other than
price will lead to rightward shift in the curve. The graph highlights the rightward shift
in the demand curve with no change in the price.

Decrease in demand
When the demand of the product decrease because of the factors other than
the price it will result into leftward shift in the curve. The graph depicts the leftward
shift in the demand curve with no change in the price under the influence of other
factors.
Factors causing shift in demand curve
Income of the consumers: As the income of the consumer increases, the demand
for the normal goods increases which results into forward shift while that of inferior
goods declines making inward shift (Dean and et.al., 2020). In case of opposite
situation, inverse will happen of the above. The graph shows as the income
increases, the demand for the good increases from Q to Q1 irrespective of change in
price.

Price of the related products: There are generally two types of products which is
substitute and complimentary which makes the demand curve move in opposite
direction. If the price of the good increases, then the demand for it might fall resulting
into increase in demand of substitute good like tea and coffee. While in case of
complimentary good, fall in the price f one good will result into decline in demand of
another like car and petrol.
Expectations: The expectation of the consumers in the future also have a huge
impact over the quantity of goods demanded. If it is expected that the price of a
particular good will rise in nearby future then the demand of it rises making curve
shift towards right or visa-versa.

Size of the population: The size of the population and its composition is also
effective in affecting the demand (Greenlaw and Shapiro, 2017). If the most of
population in a area is of small children then the demand of baby products would be
more. Higher is the size of the population, greater is the demand.
Tastes and preferences: A change in the preferences will result into reducing the
demand of the good leading to inward shift. As against it, the demand for new and in
trend product will rise making demand curve to move forward.
1.2 Law of supply
This law states about the relationship among the price and quantity supplied
which is direct in nature. When the price increase, the supply of that good also rises
and when the price decline and the supply also decrease (The Law of Supply. 2020).
The graph highlights that the as the price increased from P1 to P2 and then to P3,
the quantity of goods supplied also increased from Q1 to Q2 and then to Q3.
Movement along the supply curve
It accounts for the change in the quantity supplied with regard to the variation
in the price of the commodity. The increase in price will result into forward shift
(extension) while the decrease in it led to inward shift (contraction). The given
graphical presentation depicts that the as the price increases from £16 to £22, there
is an extension in the quantity supplied while a drop in the price from £16 to £12,
caused reduced in supply from 55 to 40 units.

Shift in the supply curve
The shift is mainly caused because of the factors other than price which
results into shift in the supply curve.
Increase in supply
The graph conveys the increase in supply with respect to change in the
factors regardless of change in the price.
Decrease in supply
When the supply of the goods declines because of the factors other than the
price it will result into leftward shift in the curve. The graph shows the inward shift in
the supply curve from S1 to S2 with no change in the price under the influence of

other factors. It can be seen that the decrease in supply because of the factors other
than the price leading to shifting the supply curve from S1 to S2.
Factors causing shift in the supply curve
Cost of production: In case, the cost pertaining to the production increases like
cost of raw material or the rise in the labour cost, then this will result into change in
the cost of production causing a leftward shift in the curve. But if the price falls, then
it will lead to business being able to supply more at the same price resulting into
outward shift.

Change in technology: Any change or upgradation in the technology will help in
increasing the production and consequently leading to rise in the quantity supplied
and providing reduced prices to consumers (Mui and Schoefer, 2019). This will
cause forward shift in the supply curve. The emergence of the latest technology has
caused the shift in the supply curve form point S to S1.
Number of sellers in the market: It is important to understand that the number of
sellers in the marketplace affects the supply. When a new firm enters, the supply
increases by the way of putting pressure in the price. When a firm decides to attain
market share instead of profit maximization, then the total supply at each price will
increase leading to rightward shift.
Government regulations and subsidies: In case of rise in the taxes which result
into rise in the cost of production causes inward shift while the subsidy leads to
decrease in the cost of supply consequently leading to outward shift while the other
regulations will rise cost casing rightward shift.
Shortage in the input factors: In case of any shortfall in the inputs required for the
purpose of production, then this affect the cost of production of Tesco. Under the
situation of deficiency, it will result into leftward shift as the production will slow
down. The chart below highlights that the because of the shortfall in the factor inputs
has resulted into inward shift in the supply curve regardless of the price of the
product like in the below graph, it shifted to point S1 from S.

CONCLUSION
It can be inferred from the above that the business is being running based
upon the concepts of economics which cannot be neglected and effectively
analysing the impact of it will help the business entities like Tesco in efficiently
accomplishing its desired goals. The basic concepts like law of demand and supply
is being evaluated along with the factors having an impact over the demand and
supply of the products and services in the market. Tesco which is giant retailer
requires to take into consideration these factors before entering into a new market or
expanding the business as this is assist in the properly managing the business
functions and tasks and attain the expected goals and outcomes. Therefore, it can
be said that economics have an important role to play in a business and its
functioning.

REFERENCES
Books and Journals
Dean, E. and et.al., 2020. Shifts in Demand and Supply for Goods and
Services. Principles of Economics: Scarcity and Social Provisioning (2nd
Ed.).
Greenlaw, S. A. and Shapiro, D., 2017. 3.2 Shifts in Demand and Supply for Goods
and Services. Principles of Econ 2e.
Hovakanyan, L., 2020. PARADOXES OF THE LAW OF DEMAND. Амберд. (2 (3)).
Mui, P. and Schoefer, B., 2019. The Aggregate Labor Supply Curve at the Extensive
Margin: A Reservation Wedge Approach.
Online
The Law of Supply. 2020. [Online]. Available Through:<
https://courses.lumenlearning.com/suny-wmopen-introbusiness/chapter/the-
law-of-supply/>.