Contemporary Economic Analysis

This report presents the concepts of law of demand and supply, movement and shift in demand and supply curves, and compares the contemporary economic theories of the 20th and 21st centuries. It also relates these theories to modern business practices. Study material and solved assignments available on Desklib.

Contemporary Economic
Analysis

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TABLE OF CONTENTS
INTRODUCTION.....................................................................................................................3
TASK 1......................................................................................................................................3
Concept of law of demand and the movement and shift in the demand curve.........3
Concept of law of supply and the movement and shift in the supply curve...............7
TASK 2....................................................................................................................................11
Comparing and contrasting the contemporary theory of economics of 21st century
with 20th century and relating to the modern business practices...............................11
CONCLUSION.......................................................................................................................13
REFERENCES......................................................................................................................15

INTRODUCTION
Micro economics refers to the study of the individual, household or the
business entities behaviour in the decision-making process and also in respect to the
allocation of resources. It mainly applicable to the market of goods and services and
also deals with the individual issues. This report presents about the microeconomic
concepts in relation to the Tesco, which is the largest retail giant in UK. It covers the
complete concept of demand and supply and also comparing the contemporary
theories of economics of 20th century and 21st century.
TASK 1
Concept of law of demand and the movement and shift in the demand curve
Law of demand
The law of demand refers to the inverse relationship between the quantity
demanded and price of the product and services assuming other factors to be
constant. When the price of the product increases, the demand of its falls ( Mazurek,
García and Rico, 2019). This law explains about the consumer choice behaviour with
respect to the change in the price. In the market, when the price of product rises, it
consequently leads to the fall in the demand of that product, which is the natural
consumer behaviour. This happens because consumers hesitate to spend more with
the fear of losing out more cash.

From the above diagram, it can be seen that demand curve is a downward
sloping. When the price of the good increases from p3 to P2, then the quantity
demanded of the good falls to Q2 from Q3 and vice-versa.
Movement of the demand curve
When there is a change in the demand of the good in terms of quantity with
respect to the change in the price and other factors remaining constant, the change
in the quantity demanded is indicated as the movement on the same demand curve.
It is very important to understand that factors like consumer income, tastes and
preferences, price of other goods and so forth, will remain constant and the only the
price of the good will change (Karl and et.al, 2019). In such scenario, the change in
price affects the quantity demanded of the good but demand will follow the same
curve like before. This is known as movement of the demand curve. This movement
can be in upward and downward direction.
It can be seen in the diagram, when the price of the good was at OP level, the
demand of eth good was at OM assuming other factors constant. But when the price
of the good increases from OP to OP”, the quantity demanded decreases to OL and
demand curve moves at the upward level. In case when price decreases from OP to
OP’, the quantity demanded increases to ON, making the demand curve moving in
the downward direction.
Therefore, the change in price leads to the movement in the demand curve
either upward or downward.
Shift in demand curve with its factors
The shift in the demand is caused by the change in the underlying
determinants of demand (Browning and Zupan, 2020). The increase in demand
shows a rightward shift and the decrease in demand shows the leftward shift.

Increase in demand
The below chart illustrated the shift in demand curve in case of increase in
demand.
It shows that when the price was 60 per unit, quantity demanded was 500, but
at the same price level the demand increases from 500 units to 600 units, making
the demand curve shift to right forming a new demand curve.
Decrease in demand
In contrast, when the demand of decreases and causing the rightwards shift in
the demand curve which illustrated below.

When the price of the good was 60 per units, demand was 500 units but when
the quantity demanded decreased at the same price level from 500 units to 400
units, there is a leftward shift in the demand curve.
This shift in the demand curve is because of the factors other than the price of
the product.
Factors causing shift in the demand curve
The reasons for shift in the demand curve of the product of Tesco are stated
below.
Change in the price of related goods
An increase in the price of the substitute goods may lead to the increase in
the demand for a particular good and therefore, causing a shift in the demand curve
to right side and the decrease in price will lead to leftward shift (Hutchinson, 2017).
Also, an increase in the price of the complimentary good will cause a decrease in the
demand and moving the demand curve to the left and vice versa.
Change in the income of the consumers
An increase in the income will lead to increase in demand of normal goods
and shifting towards right and in case of inferior good, demand decreases and
moves towards left and opposite happens when income falls.

Change in the taste of the consumers
A favourable change in the taste of the consumers will lead to increase in the
demand of the good causing rightward shift while in case of unfavourable change,
there will be decrease in the demand of the goods.
Miscellaneous
Other causes can be number of consumers in the market, expectation of
change in the price of the good in future, climate change or season etc.
Concept of law of supply and the movement and shift in the supply curve
Law of supply
This law states that assuming all other factors being constant, the price and
quantity of the goods supplied are directly related to each other. Thus, when the
prise of the good rises, suppliers increases the supply of the goods (Buechner,
2018). It shows the behaviour of the producer when the price changes and suppliers
increase the supply with purpose of earning profits.

The diagram indicates that the supply curve is upward sloping showing a positive
relation between the two. When the price was at P3, supplier was supplying Q3
quantity and as the price starts increasing the quantity supplied also increased.
Movement along the supply curve
When the price of the good changes assuming other factors to be constant,
the quantity supplied also changes. This causes movement along the supply curve
which causes either expansion or contraction. If the price increases, there will be an
increase in the quantity supplied referring to expansion in supply showing an upward
movement along the supply curve. On the other hand, when price decreases,
suppliers tend to decrease the supply referring to contraction in the supply, which
causes downward movement along the supply curve.
It can be seen in the graph, as the price increased from 15 to 20, the quantity
supplied increases from 10 to 30 and vice-versa.
Shift in supply curve with its factors

The amount of goods the suppliers are willing to supply in the market changes
with change in factors other than the price of the good. Factors other than price
affect the supply curve which causes shift in the supply curve. For example, change
in costs will cause the shift in the position.
Reasons for change in the supply curve
Following are the reasons for the shift in the supply curve due to the factors
other than the price that will affect the supply of the Tesco.
Change in cost of production
When the cost of production is low, more goods can be produced and will lead
to increase in supply causing an outward shift. The below graph shows that when the
cost of production reduced from P t P1 there is increase in quantity produced and
increase in quantity supplied from Q to Q1.
In the other case, when the cost of production rises like increase in cost of material
or higher wages, then the businesses may not be able to supply as much at the
same price which will cause an inward shift in the curve. The below graph shows that
when there is a rise in cost of production like from P to P1, the production slows
down and supply reduces from Q to Q1.

Changes in technology
The production technologies has been changing rapidly which can be seen in
the increase in the supply and the lower the prices of the consumers and causes
supply curve to shift to right.
Change in the price of the substitute goods or the price of the inputs
The increase in the price of the substitute good in the production will lead to
the shift in the supply curve of that good towards left (Hui and Wu, 2016). Also, the
change in the price of the raw material, remuneration for the factors such as rent,
wages, interest in Tesco will have a great influence over the cost of production and
consequently on the supply. Thus, an increase in the price of the factor of production

will lead to the fall in the production level, moving the curve towards left and vice-
versa.
Number of producers in the market
The sellers in the market also affects the supply. When the new firm enters
the market, supply increases putting downward pressure on the price. Also, if the
existing business-like Tesco moves towards seeking higher market share then the
supply available will increase and the supply curve will shift outwards.
TASK 2
Comparing and contrasting the contemporary theory of economics of 21st century
with 20th century and relating to the modern business practices
The economics of the 20th century is not appropriate for the 21st century
economies because in 21st century human capital and natural capital are valued
increasingly along with national product and human happiness. But on the other
hand, the world economy has been damaged because of wrong economic ideas
putted on high place like free economy which brought the Great recession and also
the simplistic measures of Gross domestic product that has ignored many
fundamental components of wealth and other activities such as pollution that is
diminishing the wealth.
John Maynard Keynes has spent his whole life working as academia, private
financial advising and management and as a British treasury. His contribution to the

economics is very fundamental and extensive (Dean and et.al, 2017). His is most
famous for his idea Great depression which was the major economic crisis of 20th
century. The effect of depression was felt worldwide. Keynes’s analysis was
focussed on eth role of savings. In this book, “The General Theory of employment”,
he has argued that the excessive saving will lead to the economic ruin. He believed
that the government should provide support while endorsing free market capitalism
and unique solution to depressions and his approach proved to be relevant.
In the year 1961, Nicholas Kaldor provided six statements which summarized
his thoughts at that time which were considered to be the most fundamental features
in the world economic growth. However, he limited his observation to modern times
and some well-developed countries. The outcome of those limitation was that five of
these facts were about the stability over a period in terms of growth of both “labour
productivity and capital per labour, the real interest rate and return on capital
invested, capital and the output ratio and the share of labour and capital in the
national income of the country”. Jones and Romer after nearly half a century in 2009,
looked at the Kaldor list and proposed the list different stylized facts which concerns
about the changes and differences and includes only one on stability. These six facts
are stated below.
 Increase in the flow of goods, finances and idea because off globalization
and urbanization which has led to the expansion of the market for all workers,
consumers and producers.
 The growth has accelerated at both population and per capita GDP as well at
the global level in last two centuries.
 The variations in the growth rate of per capita GDP has expanded due to
distance from eh technology frontier.
 Difference in the measuring inputs led to the enormous cross-country
differences in per capita GDP.
 Across the world, the human capital per labour is increasing.
 The wages of the skilled and unskilled labour have been stable but is not
reflecting the relative quantities.
Relation of these theories to the modern business practices
The variety of trend has given rise to renewed interest. The developing world
even when the growth rate is high there are some economies that ae experiencing
unsatisfactory rate of transformation and also the shortfall in generating the required

quantity and quality of jobs. These policies have brought together and created a
demand for proactive government policies with the purpose of diversifying and
upgrading the economies beyond freeing up the market. In case of developing
nations, China is the best example. On one hand, China’s success in manufacturing
has made it difficult for the middle income countries for competing the world and has
also made a contribution to the premature deindustrialization (Rahman, 2018). Also,
the Chinese industrial strategies are also an important example which shows how
the government actions can lead to the rapid economic growth, economic
diversification and the structural change. But the Chines labour cost is rising which
has increased the role of low income and low cost countries to take advantage and
the fill the gap.
These theories have helped the businesses in understanding the impact of
their actions. These theories are meant to help people in understanding the world in
a systematic way. The modern businesses value the product from the perspective of
the customers as the value is what the customer sees otherwise businesses won’t
be able to know or figure out the value of the product they are offering to the
customers. The law of demand which is the reason behind the schemes like price
skimming actually works (Maclennan and Miao, 2017). At different prices, different
segments of the customers are targeted. Also, these theories emphasized on the
fact that the businesses should be doing only that in which they are good at, as it
helps in maximising the overall competitive advantage. Now, the business has
increased their focus towards the societal and environmental goals as well because
it helps in shaping the structure of the economic activities. Generally, manufacturing
is considered to be the dirty sector with high carbon emission but it has also played
an important role in finding solutions and providing job opportunities. All these
together has contributed towards the growth and development of the economy as
whole and the GDP of the country as well.
CONCLUSION
It can be concluded from the above that economics has a huge influence over
the economy as a whole. Both microeconomics and macro economics plays an
important role from managing the individuals to the whole nation. The implication of
law of demand and supply over Tesco organization and identifying the reasons for
the movement along the demand and supply curve. It also determined the causes of

shift in demand curve like price of related good, income of the consumers etc. and
the causes of shift in supply curve like cost of production, cost of inputs, change in
technology, number of producers in the market and so forth. Also, the implication of
various economic theories on the modern business practices and its relation with it.
Thus, economics have an important in a business.

REFERENCES
Books and Journals
Browning, E. K. and Zupan, M. A., 2020. Microeconomics: Theory and Applications.
John Wiley & Sons.
Buechner, M. N., 2018. A comment on the law of supply and demand. Journal of
Philosophical Economics. 11(2). pp.67-80.
Dean, E. and et.al, 2017. Principles of Microeconomics-Scarcity and Social
Provisioning.
Hui, G. and Wu, C., 2016, November. Demand Curve and Bliss Point. In First
International Conference Economic and Business Management 2016. Atlantis
Press.
Hutchinson, E., 2017. 3.4 Building Supply and Producer Surplus. Principles of
Microeconomics.
Karl, E. and et.al, 2019. PRINCIPLES OF MICROECONOMICS. PEARSON.
Maclennan, D. and Miao, J., 2017. Capital, Housing and Inequality in the 21th
Century. Housing Theory and Society.
Mazurek, J., García, C. F. and Rico, C. P., 2019. The law of demand and the loss of
confidence effect: An experimental study. Heliyon. 5(11). p.e02685.
Rahman, M., 2018. Validity of Malthusian Theory of Population in 20th Century in
Terms of Using Scientific Technology to the Economic Growth and Strength.