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Economic Principle: Demand & Supply Elasticity

   

Added on  2020-05-08

4 Pages737 Words97 Views
Running head: ECONOMIC PRINCIPLE 1Economic PrincipleNameInstitution

ECONOMIC PRINCIPLE 2Market equilibrating processThe law of demand states that more will be demanded when share price in marketreduces and when their prices increase, less will be demanded, when other factors remainconstant. Law of supply indicates that at high prices, more is supplied and at low price, less issupplied. When the buyers’ income increases, more shares will be demanded hence increasingits price, similarly the supply of shares will increase and if the disposable income of the buyerreduces, the shares becomes unaffordable, the supply reduces, price increases hence less of theshares will be demanded.Movements along vs Shift in curvesMovement along a supply curve is caused by alterations in price, for instance if the valueincreases from A0 to A1 the quantity to be supplied should increase from S0 to S1. And whenprice reduces from A1 to A0 the supply will reduce from S1 to S0. Shift in supply is caused byfactors such as decline in the cost of production. If the cost production reduces the supply curveshifts to the right meaning that there is an increase in quantity supplied and if the cost productionincreases, the supply curve moves to the left meaning that there is a reduction in the quantity ofgoods to be supplied. Therefore movement in the demand curve and change in supply curvebrings about a state of equilibrium where the supply and demand curves meet hence settingmarket price.Importance of elasticityPrice elasticity is the responsiveness to change in demand due to change in price. Priceelasticity can as considered as a % change in amount needed divided by % change in price. For

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