Explaining Law of Demand and Law of Supply

This article explains the law of demand and the factors that cause changes in the demand curve, as well as the law of supply and the factors that lead to shifts in the supply curve. It also compares 20th century economic theory with that of the 21st century.

Contemporary Business
Economics

TASK 1............................................................................................................................................2
1.1 Explaining law of demand and the factors that causes change in the demand
curve............................................................................................................................................2
1.2. Explaining law of the supply and the factors that leads to shift in the supply curve
.....................................................................................................................................................5
TASK 2............................................................................................................................................8
Comparing 20th century economic theory with that of 21st century....................................8
REFERENCES............................................................................................................................11

TASK 1
1.1 Explaining law of demand and the factors that causes change in the demand curve
When quantity demanded of a particular product or the commodity changes due
to the changes in the price along with the other factors remains as constant, there
results a movement in the quantity demanded along with same curve. The most
significant aspect is that the other factors such as income of the consumer and the
tastes with price of the other types of goods remains as constant & only price of the
goods changes. In such case changes in the price impacts quantity demanded but the
demand follows same curve as before price changes (Marwala and Hurwitz, 2017). It is
called as the movement of demand curve and this movement could occur either in
upward or the downward direction along with a demand curve. The movement could
either be occurred in upward or the downward direction along with the demand curve.
In case if all the other factors remains as constant then a rise in prices of the commodity
leads to decrease in the demand. Also the decrease in price results to increase in the
demand.
The above diagram shows that the price increases from the OP point to the OP’’, the
quantity demanded declines or falls to the point OL and this results the demand curve to
move in upward direction. On the other hand, when the price declines from the point OP

to OP’, quantity demanded increases to the point ON and this leads the demand curve
moving towards the downward direction.
Shift of Demand Curve
At the time when quantity demanded changes of the specific commodity at each and
every possible price because of the change in one or more than a single factor, this
leads to shift in the demand curve. The most essential aspect of it is that the other
factors such as income, taste and preferences of the consumer with price of the other
goods that were expected as to remain as constant get changed. In such situation,
change in the price with change in one or more than one factor impacts quantity
demanded (Shift in demand curve, 2018). Thus, demand follows the different type of
curve for each and every kind of the price change. This is called as the shift in the
demand curve as the curve could be shifted either from left to right or from right to left,
depending on different factors that are affecting it.
Demand for the goods and the services does not remain as constant over the time and
as a result, demand curve shifts left or right on a constant basis. There are mainly five
different factors that causes a shift or the change in the demand curve that are as
follows-

Income- Change in an income affects a demand curve to a larger extent in
several ways which depends on the type of the goods that includes normal goods &
inferior goods. In case of the normal goods, with increase in income, the demand also
increases. This means that rise in the income results to shift of the demand curve
towards right. The main reason behind this is people with higher salary could be able to
afford in buying more of the particular goods. On the contrary, in case of inferior goods,
demand falls with growth in an income (Davies, 2019). This indicates that increase in
the income shifts demand curve towards left. For example- bus rides as if the person
doesn’t have sufficient money for buying car or the taxi; they need to travel through bus.
On other side, once an income of the people allows the m to purchase a car then they
does not require bus rides. Thus, demand for the bus rides decline with increase in
income & vice versa.
Tastes and the trends- When the goods and the services come into trend or
fashion then its demand curve shift to right side. On other state, demand curve shifts
towards left once the new fashion emerges, the goods and the services goes of fashion
and this results a demand curve towards left which means decrease in demand.
Price of the related goods-There is two kinds of related goods that shifts
demand curve in the opposite directions that include complementary and substitute
goods.
In case of substitute goods, decline in price of one commodity leads to decrease
in demand for the other good. Thus, substitute goods are counted as the goods which
could be used for replacing one good to another. More closely related goods; stronger is
the possibility of shift in the demand curve with change in the price of related goods. For
example- Tea and Coffee, increase in the price of coffee results to increase in the
demand for Tea while decrease in the price of the coffee leads to decrease in the
demand for tea and the demand for coffee will increase. In case of complementary
goods, fall in price of one commodity lets to increases the demand for another good. It
is the case when two goods are been used together (Makowski and et.al., 2017). For
example- car & petrol, when the car becomes as more and more cheaply, more people

would be buying it. As a result, demand for the petrol rises as newly bought vehicles
needs sufficient gas.
Expectations- People’s expectations regarding the future could have significant
effect on the demand or specifically their expectation with regards to the future prices or
other types of the factors could change the demand. In case if consumers expect that in
future price will rise, the current demand for that specific commodity will increase and
this leads to rightward shift in the demand curve.
For example- if the consumers are having a reason for believing that price of an
ice-cream would be falling tomorrow; they would not be buying ice-cream in present
condition but will be waiting till they could get it at cheaper rate. On other hand, in case
they expects that their income will rise this month then they would be more likely in
spending money more on the ice-cream this month even if their respective income and
has not been changed yet.
Size and the composition of a population- Higher the population results in
higher demand for majority of the goods. As the result, demand curve shift towards right
and this means that the demand is increasing (Li and Yang, 2017). For instance- As
population increase, demand for the food increases as there would be more mouths for
feeding. Addition to this, composition of population also poses a great impact on
demand curve. For example- in case, presently a country is experiencing baby boom,
then the demand for the diapers rises.
1.2. Explaining law of the supply and the factors that leads to shift in the supply curve
The law of supply reflects that other things or the factors remains as constant, quantity
supplied and price of the commodity directly relates to each other. In other words, when
price paid by the purchasers for the specific commodity increases then suppliers
increases supply of that particular good within the market (Takemura, 2020). Supply law
depicts that the behavior of the producer at the time of changing prices of product and
the services. When price of good increases, supplier increases supply for the purpose
of earning profit due to higher prices. This is stated as the movement along same

supply curve which shows the positive relationship between quantity supplied and the
price.
The above stated diagram reflects that supply curve which is sloping upward depicts
positive relation between price and the quantity supplied. When price of the good was
lying at P3, supplier was supplying Q3 of the quantity. Moreover, as price rises, quantity
supplied also started increasing or rising.
Shift of supply curve
There are various factors other than the price which affects supply curve in different
way. Such factors causes shift in the supply curve. This shift can be categorized into
two that is rightward and leftward shift (Factor result in shift of supply curve, 2018). This
shift occurs as price remains constant at the time of studying an impact of the other
factors on the supply. Rightward shift shows a positive impact on curve while leftward
shift indicated negative effect on supply curve. The factors could either have direct or
indirect relationship with quantity supplied of the commodity.

Direct relationship with the supply
Factors such as sate of the technology have the direct relationship with supply. In other
words, change in these factors and the supply represented in same direction. As the
result, increase in such kind of factors causes a shift in rightward direction. On other
side, decrease in such type of factors causes shift of the curve towards left side.
Inverse relationship with that of supply
Factors such as price of the other goods tended to be within inverse relationship with
supply of goods. A change in such type of factors and the supply occurs in the opposite
direction. However, negative change in such kind of the factors leads to a positive
change in the supply & vice versa. In terms of an effect, rise in such factors results to
shift towards a leftward direction (Bhandari, 2018). However, decline in factors causes
rightward shift of supply curve.
Apart from the above there are other factors which causes a shift in supply curve that
are as follows-
Number of the sellers- When more entity enters into the market for selling a
particular service or the good, the supply of that specific good increases. This means
that supply curve would shift towards right direction. However, when the firm exits from
the market, supply fall which means that supply curve shifts to left. For example- If in a
country there is only one restaurant which is selling burger then demand for the burgers
seems as high.

Social & natural factors- There are large number of the natural & social factors
which affects the supply. Natural factors affect the proportion that the seller could
produce whereas social factors have a greater impact on the proportion that they want
or desire to produce. For example- natural disasters, weather conditions etc affect the
supply to a large extent. Meanwhile, example of the social factors involve increased
demand for an organic product, minimum wage legislations etc.
Expectations- If sellers expects that the prices will be rising in future, they would
be holding some of the output back for the purpose of increasing supply in future at the
time when it becomes as more and more profitable. For instance- At time of festival,
demand for burgers rises significantly; this leads to increase in its price. Thus, due to
this the burger restaurant decides for keeping some of ingredients of this week in
storeroom and make use of it for making some of the additional burgers at the time of
festival.
TASK 2
Comparing 20th century economic theory with that of 21st century
Keynes theory (20th
century)
Modern Keynesian
theories (21st century)
In this century, economists
had fixated that GDP is the
foremost measure of an
economic progress,
however, GDP is
considered as the false
goal waiting to be as
ousted.
On the other hand, this
century calls for a more
ambitious and the global
economic type of goals
which indicates meeting the
needs of all across the
world or planet.
John Maynard Keynes,
British economist and the
financial genius had
However, modern
Keynesians bases their
ideas on a version of the

developed this theory,
which lived from the year
1883 to the 1946. In the
years 1936, he had
published the general
theory of an employment,
Money and the interest.
Keynes General Theory
which assumes that the
wages and prices are seen
as sticky.
At this time Keynes
believed that there was only
one method out, which was
stated for government in
starting the spending for the
purpose of putting money
into the pocket of private
sector and getting demand
for the products and the
services.
The significant contributions
by Keynesian are reflected
as the free market
economies that might
support to any
unemployment rate as
equilibrium (Makowski and
et.al., 2017). The main idea
from that of microeconomic
theory is that an individual
are goal-oriented and
rational & they does not
make for systematic
forecast of errors.
The greater significance of
the Keynes work mainly lies
in view to put forth about
role of the government in
the capitalist economy.
It has been recognized in
modern theory that the
market system might result
to inefficient outcomes with
higher unemployment and
does not believe that the
fiscal policy is counted the
right response to the
financial crisis.

Classical Theory(20th century) Keynesian Theory (21st century)
Equilibrium income level and an
employment is been established only at a
level of the full employment. Premises in
relation to full employment run towards
whole structure of such theory.
It states that equilibrium level of an
employment and the income is been
established on point at which aggregate
demand equates to aggregate supply.
However, this need not seems to be full
employment as equilibrium could be seen
as below a level of the full employment.
Full employment equilibrium is seen as
normal situation. There does not seen any
possibility of an
Under employment type equilibrium in long
run.
As per this theory, under- employment
kind of equilibrium is seen as the normal
situation, on the other hand, full
employment type of equilibrium is counted
as a special and an ideal situation.
It is the theory that is based on belief that
the supply creates their own demand
which reflects that entire output is been
demanded and is sold out. Thus, there is
no general over-production or the
unemployment.
In accordance to this theory, Supply itself
could not create the matching demand that
generally resulted in unemployment and
the overproduction (Davies, 2019). On
contrary to classical theory, it states that
demand can create its own supply.
In case of the temporary condition of
unemployment, this theory depicts that the
cut in the money wages lets to increase
employment.
Employment could be increased by way of
increasing effective demand and wage cut.
A change in the interest rate establishes
equilibrium between investment and the
savings.
Variation in the income brings about the
equilibrium between investment & savings.

REFERENCES
Books and journal
Bhandari, N., 2018. Hike in prices of petrol and its impact on demand and
supply. International Journal for Advance Research and Development. 3(8). pp.33-37.
Davies, R. E., 2019. Laws of Demand and Supply.
Li, Y. C. and Yang, H., 2017. A mathematical model of demand-supply dynamics with
collectability and saturation factors. International Journal of Bifurcation and
Chaos. 27(01). p.1750016.
Makowski, M. and et.al., 2017. Profit intensity and cases of non-compliance with the law
of demand/supply. Physica A: Statistical Mechanics and its Applications, 473, pp.53-59.
Marwala, T. and Hurwitz, E., 2017. Supply and Demand. In Artificial Intelligence and
Economic Theory: Skynet in the Market (pp. 15-25). Springer, Cham.
Takemura, R., 2020. Economic reasoning with demand and supply
graphs. Mathematical Social Sciences. 103. pp.25-35.
Online
Factor result in shift of supply curve. 2018. [Online]. Available through :<
https://quickonomics.com/factors-that-cause-shift-in-demand-curve/>
Shift in demand curve. 2018. [Online]. Available through :<
https://quickonomics.com/factors-that-cause-shift-in-demand-curve/>