Law of Demand and Supply: Movement and Changes

This document discusses the law of demand and supply, their movement along the curves, and changes due to various factors. It also compares emerging economic theories and models such as Keynesian theory, Monetarism theory, and Fisherian theory.

CONTEMPRARY ECONOMIC

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
TASK 1............................................................................................................................................3
Law of demand, its movement along the same demand curve and changes due to factors.........3
Law of supply, its movement along the same supply curve and changes due to other factors....7
TASK 2..........................................................................................................................................10
Comparison of emerging theories and models...........................................................................10
CONCLUSION..............................................................................................................................11
REFERENCES................................................................................................................................1

INTRODUCTION
Economics can be defined as that branch or area that studies the production,
consumption and distribution of the wealth in the economy. This can be done at an
individual level or at the level of the entire economy as a whole (Davies, 2019). Demand
and supply are two major factor of the market and these will be analysed in the report.
The different aspects, law and movement or shift in the supply and demand curve will
be evaluated and analysed along with the critical evaluation of the different economic
theories. In the last an appropriate conclusion will be presented summing up all the key
points.
MAIN BODY
TASK 1
Law of demand, its movement along the same demand curve and changes due to
factors.
Law of demand describes the relationship between the demand of a particular good in
the market and its impact on the price of that particular good. The law of demand
depicts the inverse relationship of the price of a good with its quantity demanded. It
states that when the price of a good will increase, the demand for that particular product
in the market will automatically decline (Petrova, Posadneva and Morozova, 2019). The
reason behind this inverse relationship is because of the diminishing marginal utility, i.e.
the demands that are most urgent are first met by the consumers and it is then followed
by the lower valued requirements that are met after urgent requirements are met. The
market demand curve which depicts the collective demand of all the consumers in the
market regarding a particular product is always downward sloping, i.e. the when prices
are high, the demand of the consumers for that product automatically decline.

It can be clearly deduced form the illustration above that the as the price of a product
increased from P1 to P2, the quantity demanded of that product automatically reduced
from Q1 to Q2.
Movement along the demand curve: Movement signifies the increase or decrease in
the quantity demanded due t the increase or decrease in the price of the product,
keeping other factors constant such as taste, preference, income etc. (Franks and Bryant,
2018). Demand curve here moves either upward or downwards i.e. there is either
increased demand or decreased demand. This movement is based on the assumption
i.e. Ceteris Paribus which illustrates the change in quantity demanded of the product
along with the change in its price assuming that all other factors that could impact
change remain constant.
Illustration 1: Law of Demand

It can be clearly seen from the movement of demand curve that when the price of a
commodity decreases from P to P1, then the demand curve moves downward direction
i.e. the demand for that product increases from Q to Q1 which is called expansion of
demand. Similarly, when the price of that good increases from P to P2, then there is an
upward movement in the demand curve i.e. quantity demanded decreases from Q to Q2
thus showing contraction in the quantity demanded.
Change in the Demand Curve: Change in the demand curve is a separate
phenomenon as compared to the movement in the demand curve (Guan, 2017). Shift
occurs when the quantity demanded of a particular good increases or decreases due to
change in the other factors keeping the price of the commodity as a constant. There are
many other factors that can affect the demand of the product such as :
 Income: This affects the demand on the basis of the product i.e. if the good is
normal good then the increase in demand leads to increase in the quantity
demanded and if good is an inferior good, then the increase in demand leads to
decrease in the demand of such inferior goods (Franks and Bryant, 2017).
 Taste and preference: This is another aspect which focuses on the changing
trends and patterns in the market along with which the requirement of the
consumers also keep changing. For instance, when a product that is fashionable
Illustration 2: Movement in Demand Curve

or in trend comes in the market, then its demand increases thus making the
curve shift towards right and vice-e-versa when product goes out of fashion.
 Price of Related Goods: There are two categories of goods i.e. complementary
goods and substitute goods that affect the quantity demanded for a particular
product (Mazurek, García and Rico, 2019). Substitute products are those whose
price increase leads to increase in the demand of current goods for instance,
when the price of coffee increases, demand for tea increases and opposite when
the price of coffee decreases. Complementary goods are those whose demand is
positively related i.e. increase in the price of good will lead to decline in the
demand for complimentary good, for instance, when the price of petrol increases,
the demand of its complementary good, car, decreases.
The above figure shows that the price is a constant figure and the demand is shifting
due to other factors. When the quantity of goods demanded increases from Q to Q1
then the demand shifts in a right direction i.e. from demand curve D it has shifter to
demand curve D1 and when the quantity demanded decreases, the curve shifts towards
left i.e. from D it shifts to D2. The factors described above along with other factors such
as expectations, size and composition, government taxes etc. impact the demand and
therefore the shift in the demand curve gets affected accordingly (Cerreia and et.al.,
2016).
Illustration 3: Shift in Demand Curve

Law of supply, its movement along the same supply curve and changes due to other
factors.
The law of supply is a major concept in economics that states that when the prices of a
particular commodity increases, the quantity of those goods supplied in the market by
the suppliers will also increase (Davies, 2019). Law of supply is upward sloping
because of the concept on which it is based i.e. as the price of a product goes up the
suppliers will try to maximize their overall profit where they will try to increase the
quantity of the goods that are supplied in the market of such profitable goods thus
increasing their overall profit. A supply curve is always upward sloping because it
depicts a direct relationship between the price of the commodity and its quantity
supplied in the market where the other factors are assumed to remain constant.
The above diagram clearly depicts that the as the price of the commodity increases, the
supply of the goods in the market increases because the suppliers tend to maximize
their profit, thus making more gods available in the market. Therefore, as the price of
the product keeps increasing, its supply also keeps getting increasing (Marwala and
Hurwitz, 2017). This leads to the supply curve becoming positively sloped as opposed
to demand curve which is negatively sloped due to its inverse relationship with price.
Illustration 4: Supply Curve

Movement in the supply curve: This occurs when it is assumed that all the factors
other that price will remain constant and the impact of price is then shown on the
increase or decrease in the supply of that commodity in the market.
The above graph helps in ascertaining the movement of the quantity supplied in the
market where the increase in price of the goods from P1 to P2 leads to increase in the
surly of that goods form Q1 to Q2. This upward movement is known as expansion in the
quantity supplied of that particular commodity. Similarly, when the price of the goods fall
in the market from P1 to P3, it leads to fall in their quantity supplied as well i.e. the
quantity declines form Q1 to Q3 thus showing that there is a downward movement in
the supply curve. This leads to the contraction of the supply curve i.e. the quantity of
that particular good supplied in the market decreases because it becomes less
profitable (Yoshii, 2017). This is known as movement in the supply curve where only
price factor is taken into consideration while evaluating the increase or decrease in the
quantity supplied of that particular commodity in the market.
Shift in the supply curve: Unlike the above movement in the supply curve, the shift on
the supply curve occurs when all the other factors except price are taken into
consideration while monitoring the supply of that particular product. There are various
other factors that affect the supply of a particular commodity in the market such as:
Illustration 5: Movement of the supply curve

 Input Prices: There are a different input requirement level for different type of
commodities that are being supplied. When the inputs increase, it leads to
increase in the cost of the goods thus causing a decrease in the supply (Petrova,
Posadneva and Morozova, 2019). This tends to develop shift of the supply curve
towards left.
 Number of sellers: The number of producers and sellers of a commodity in the
market is also a major factor which impacts the supply. When there are more
sellers, the supply of that particular commodity increases in the market causing a
shift towards right. When the suppliers exit the market, it leads to a shift towards
the left since quantity supplied decreases.
 Technology: The advancement of the technology also impacts the supply and
productivity of the goods in the market. When the technology increases, the
production increases thus increasing the supply in the market (Wei and Wentao,
2016). This leads to the supply curve shifting to the right and vice-e-versa.
 Natural and Social Factors: Natural factors can impact the supply of the goods
in the market where the supply can either increase or decrease causing the
supply curve to shift to the right or to the left.
 Expectations: The expectations of the sellers is another major factor, i.e. when
the seller assumes that the market will be bullish or bearish and accordingly
supply their pro9dutcvts. When the market is on rise, supply increases thus
causing a right shift in the curve and vice-e-versa when it decreases.
Illustration 6: Shift in Supply Curve

The above graph clearly shows that the other factors causes an increase or decrease in
the supply and the price is treated as a constant factor. When the supply increases, the
curve shifts towards right from S1 to S2 and when the demand decreases the curve
shifts towards the left i.e. from S1 to S3.
TASK 2
Comparison of emerging theories and models
The economists' theory are always modifying and emerging and these models help in
developing the theoretical trends and policies that affect the manner in which the
theories at macro economic and micro economic level operate.
Keynesian Theory: Keynesian Theory was given by John Maynard Keynes and it was
given in the 20th century to understand the impact of Great Depression and its impact of
economy at different levels i.e. at micro economic and macro economic levels
(Buechner, 2018). The theory basically illustrates that how the aggregate or total
spending in an economy impacts the output level of the inflation in a particular
economy. This theory stated that the government policies can be used to manage the
aggregate demand in a n economy and the this will help in addressing the problem of
recession or depression in the economy. The Keynesian theory recommended that the
fiscal and monetary policies can be used to manage the trends in the economy thus
controlling them and addressing the problem of unemployment in the economy. This
classical economic theory states that the economy would not return to its natural state
of equilibrium on its on and if depression once begins, then it tends to further deepen.
He therefore, developed a fiscal policy through which the government could develop
deficit spending thus declining the investment and ultimately lead to stabilize the total or
aggregate demand.
However, it has been heavily criticized by the free market theorists which state that
market is self-regulating and the factors of demand and supply will ultimately lead to the
market resorting its original position and therefore market will be in equilibrium again
(Robinson, 2017).
Monetarism theory or Friedman Theory: The monetarist theory was developed in
counter or opposition of the Keynesian Theory and this theory stated that the
simultaneous change in the supply of money would lead to change in the rate of

economic growth as well as the behaviour of the cycle of business. This theory gave
emphasis to the monetary levers in the economy where the banks had increased power
to control the market forces and thus regulate the state of equilibrium or disequilibrium
in the market. The power is given to the money supply factor where the rate of growth is
directly dependent on the supply of money in the economy. The Friedman theory or the
Monetarist theory stated that the MV=PQ where M refers to the supply of money, V
refers to the velocity i.e. the total numb of times per year when the dollar is spent, P is
the price of the goods or services in the market and the last factor Q is the quantity of
goods and services that are being demanded in the market (Fetterolf and Rudman,
2017). However, with the advent of Recession in the 2007-08 led to the speculation of
the fact that the fiscal policies need to be integrated with such monetary supply in the
market and therefore this theory also, through largely accepted, faced criticism form
many of the market experts.
Fisherian Theory: This 21st century theory given by Irving Fishers states that the
inflation can be linked to the real and nominal interest rates that are prevalent in the
market. The interest rates tended to fall as the inflation in the economy rises only if the
increase in nominal rate was equivalent to the increase in the inflation level of the
economy. The real interest rate can be determined as the nominal interest rate minus
the inflation rate that is expected (Zweifel, Praktiknjo and Erdmann, 2017). This theory
also takes into account the supply of money in the economy and states that the supply
impacts the nominal interest rate and inflation rate in the economy by the real interest
rate is left unaffected. Additionally, this theory was further expanded into development
of an International Fisher Effect which is an exchange rate model and can be used in
international trading or for-ex trading. This theory has ben largely supported form
various experts and other theorists stating that it is a perfect theory that details how the
movement of an economy can be controlled and monitored and which are the factors
that impact the manner in which the economy operates.
CONCLUSION
The research conducted in the report above helps in concluding that the demand
and supply are two major forces that affect the market demand and supply. The law of
demand and supply was analysed and the different factors that can affect the supply or

demand in a market were evaluated and ascertained. Consequently, in this report a
critical analysis was made on the three major economic theories which were the
Keynesian Theory, Monetarism theory and Fisherian Theory prevalent in the 20th
century and emerging in the 21st century. This helped in determining how different
theories affected the manner in which the economy was operating and the drawbacks
and advantages of different theories.

REFERENCES
Books and journals
Cerreia, S and et.al., 2016. Law of Demand and Forced Choice.
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.
Guan, D. X., 2017. Transaction Cost and the Law of Demand.
Franks, E. and Bryant, W. D., 2017. The Uncompensated Law of Demand: A ‘Revealed
Preference’approach. Economics Letters. 152. pp.105-111.
Franks, E. and Bryant, W. D., 2018. The Uncompensated Law of Demand in an exchange
economy. Economics Letters. 168. pp.127-131.
Wei, J. and Wentao, Y., 2016. The enforcement of the property law and supply chain finance:
Empirical evidence from bank loans pledged by accounts receivable. Economic
Research Journal, (1), p.12.
Petrova, G., Posadneva, E. and Morozova, T., 2019. Leading the Labour Market by the Laws of
Supply and Demand. In Sustainable Leadership for Entrepreneurs and Academics (pp.
263-271). Springer, Cham.
Yoshii, S., 2017. An Extinction of Adjustment Time and an Introduction of Stability Condition
in Economics through Misunderstandings to JS Mill’s Law of Supply and Demand and
International Value Theory. In A new construction of Ricardian theory of international
values (pp. 245-263). Springer, Singapore.Marwala, T. and Hurwitz, E., 2017. Supply
and Demand. In Artificial Intelligence and Economic Theory: Skynet in the Market (pp.
15-25). Springer, Cham.
Buechner, M. N., 2018. A comment on the law of supply and demand. Journal of Philosophical
Economics, 11(2), pp.67-80.
Davies, R. E., 2019. Laws of Demand and Supply.
Zweifel, P., Praktiknjo, A. and Erdmann, G., 2017. Energy economics: theory and applications.
Springer.
Fetterolf, J. C. and Rudman, L. A., 2017. Exposure to sexual economics theory promotes a
hostile view of heterosexual relationships. Psychology of Women Quarterly, 41(1),
pp.77-88.
Robinson, T. J., 2017. Economic theories of exhaustible resources. Routledge.
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