Understanding Law of Demand and Law of Supply in Economics

This report explains the crucial concepts and theories of economics, including the law of demand and law of supply. It covers factors affecting demand and supply, movement along the curves, and shifts in the curves. It also compares 20th and 21st century economic theories and their relevance to modern practices.

ECONOMICS

TABLE OF CONTENTS
INTRODUCTION......................................................................................................................3
TASK 1......................................................................................................................................3
1.1 Understanding law of demand.........................................................................................3
1.2 Understanding law of supply...........................................................................................6
TASK 2....................................................................................................................................11
Comparing and contrasting the 21st and 20th century economics theories and model and
relating it to modern practices..............................................................................................11
CONCLUSION........................................................................................................................13
REFERENCES.........................................................................................................................14

INTRODUCTION
Economics is a branch of social science which deals with the production,
distribution or the consumption of the goods and services. It works on establishing a
relationship among the demand, supply and price of the goods based upon which various
business-related decisions are undertaken. This report is based on the organization Lidl,
which is an international discount supermarket chain, headquartered in Germany. This report
presents about the crucial concepts and theories of economics which involves demand and
supply. It also covers the various factors which are having an impact over the same. It also
provides a comparison between the economic theories pertaining to 20th and 21st century.
TASK 1
1.1 Understanding law of demand
The law of demand is the most important theory in economic which refers to the change in
the demand of the goods in respect to the fluctuation in the price of it. It addition to this, it
based upon the assumption that the all other things will remain the same. As the price
increases, the demand of the commodity falls and in the same way, as the price falls, the
demand of the same increases (Lawrence, 2018). It has been illustrated in the below graph,
as the price rises to point P1, the quantity demanded decreases to Q1 while as the prices
reduced to P3, the quantity demanded rises to point Q3. This is known as the law of demand.
Movement along the demand curve
The movement on the demand curve mainly happens under the situation when the
demand of good changes due to the change in its price while other things remain the same. In
respect to Lidl and with reference to the below graphical representation, it can be stated that
when the price of the goods of the company increases to 12 from 10, this caused reduction in

demand to 40 units, this is known as the contraction along the demand curve. On the other
side, when the price reduces to 7, this resulted into rise in the demand of the product which is
referred to as the expansion in demand.
Shift in demand curve
The shift in demand curve cane either rightward or leftward which is because of factors other
than price. The below graph provides an insight into the shift in the demand curve from the
point D to D1, inward shift, which was due to reduction in the quantity demand of the
product and in contrast to it rightward shit from D to D2 due to rise in demand.

Factors causing shift in demand curve
Price of the related products: It involves two types of goods substitutes and the
complimentary goods. Under the situation, when there is a rise in the price of normal goods,
this increases the demand of the inferiors or substitute goods. In case of Lidl, the situation of
substitution is can be seen when there is comparatively reduced price being offered by its
rival for the similar goods (Mulhearn and Vane, 2020). The below diagram explains the
effect of price reduction in substitute goods over the demand of normal goods, the demand
decreases from D to D1.
Size of the population: the population also plays an important role in respect affecting the
demand of the goods. If the population is having most of the children, then the demand for
the products pertaining to children will be higher. Therefore, Lidl is required to establish its
stores in the locality where it will meet with its target customers. When the population is
more, the demand curves move towards right otherwise towards left.
Tastes and preferences and expectations: This factor is also having an impact over the
demand of the goods along with the expectations of the people (LESTARI and et.al., 2020).
If the customer of Lidl expects that the price will rise in the future, then the demand will
increase now, making the demand curve shift rightward or vice versa.
Income of the consumers: It is an important factor as the income of the consumer increases,
then it will lead to increase in demand of normal or high-quality goods and thus, reduces the
demand of low-quality goods (Das, Varghese and Pattanaik, 2018). Thus, resulting into
making the curve shift towards the right in respect to the normal goods and left in case of

inferior goods. As given in the below example, as the income increases, the demand for
goods, increased from Q to Q1.
1.2 Understanding law of supply
The law of supply represents a relation among the supply and price which is directly
proportional to each other. This is due to the reason that as the price rises, the supply of it
also rises and in case, price falls, supply is also decreased (Demel, Mariel and Meyerhoff,
2019). With reference to the below graph, it clearly shows the relationship among supply and
price as the price reduces to point P1, the quantity supplied also decreases to point Q1 and as
the price rises to P3, the amount of quantity of goods supplied also increases to point Q3.
Movement along the supply curve

This represents the adjustment in the supply with reference to the change in the price of the
goods assuming other factors to be constant. The rise in price results into expansion along the
supply curve and on the other hand, decline will result into inward move (contraction) (Torr,
2019). As given in the graph below, as the price rises to £22 from £16, there is an expansion
along the supply curve and in case of fall in price to £12 from £16, it causes contraction in
supply from 55 units to 40 units.
Shift in the supply curve
The shift in the supply curve occurs when there is a change in the factors other than the price
of the goods. The below graph shows the shift in supply curve from S to S-, leftward shift
because of fall in the quantity supplied and a rightward shift from S to S+ due to increase in
the supply.

Factors causing shift in the supply curve
Cost of production: This factor mainly involves the costs of inputs used in the production of
goods. When the price increases, this leads to making business not able to supply the needed
amount of goods which results into causing the supply curve to shift to the left side from S to
S2 (Pohoaţă, Diaconaşu and Crupenschi, 2018). In other situation, when the cost of
input decreases, the production cost in relation to it also decreases which conveys that the
company Lidl would be able to supply more at the same price, moving towards right from S
to S1.

Change in technology: When there is a change or upgradation in technology it results into
requiring Lidl to introduce it within the company which will help in effectively meeting with
the changing demand and needs of the people (Cai, 2020). Thus, change in technology will
lead to increase in supply of the products along with providing it at the reduced prices to the
end consumers. This causes shift in the supply curve right side to S1 from point S and
therefore, the quantity supplied rises to Q1 from Q.
Number of sellers in the market: This factor is also important as it is also having an
influence over the supply curve. For the organization like Lidl it is crucial to take into
account this factor while undertaking the business decision. In such a situation, when there is
a rise in the number of buyers in the market, then it will cause pressure over the price
(Redlich, Moritz and Wulfsberg, 2018). In addition to this, in case if the organization
chooses to put more attention in respect to grabbing the higher market share rather than just
achieving more profits, this results into increase in the supply at different price levels which
consequently leads to making supply curve shift towards the right side.
Shortage in the input factors: There are numerous factors which makes a contribution
towards the production of goods and if the prices pertaining to such factors rises like the
labour cost will have an impact over the cost of production (Aspromourgos, 2019). Thus, it
might lead to an inward shift in the supply curve which is due to the decrease in the
production. The graphical representation below, shows that due to shortage of the input
factors, the supply curve shifted outward as there is a slowdown in the production as it shifts
to S1 from point S.

Government taxes and subsidies: There are number of rules and regulations which are
required to be accounted for by the organizations like Lidl as these factors have a great
impact on the supply. For instance, there is an increase in taxes, then it will cause a rise in the
cost of product, thus making an inward shift in the supply curve while in case of subsidies,
which helps in reducing the cost will cause a rightward shift of the supply curve. But, in case
of increase in regulatory cost, the curve will shift towards left.
TASK 2
Comparing and contrasting the 21st and 20th century economics theories and model and
relating it to modern practices
There were number of economic theories which came each of them were criticised
and argued in respect to its genuineness. In respect to the 20th century theory, the classical
theory was given by Adam Smith, known as the father of classical economic theory along
with the founder of invisible hands theory. Under this theory, the self-regulating democracies
and the capitalistic market development can be formed as the basis of the classical theories.
This theory was created after industrial revolution. His revelation was mostly around the free
trade and the concept like the invisible hand which was used as the theory pertaining to the
initial stages of the domestic and the international supply and demand (Webster, 2018). The
study by Adam Smith helps in promoting domestic trade which results into leading more
efficient and rational pricing within the product markets which is built on the demand and
supply. The theory demonstrated the way how an apparent chaos pertaining to competitive
buying and selling is transmuted into a structured and organized system of economic
cooperation which helps in effectively meeting with the needs of the people along with

creating wealth and this is possible by way of individual choices as against the central
direction.
Apart from this, the other theory from the 20th century is Maxism theory proposed by
Karl Marx, which represents both social and political theory as well. As per the view of Karl
Marx, the capitalist society is made of 2 classes, one is business owners who is having control
over the production while the other is workers whose labour and hard work is transformed
into valuable goods and commodities of economic value (Ioffe, 2017). It is also stated that
the ordinary laborers mainly do not have the means of production like the factories, materials,
equipment and thus have little power in the capitalist economic system. in addition to this,
the labourers are also readily replaceable under the situation of high unemployment which
results into further devaluing their perceived worth. In order to maximise the profitability, the
business owners provide incentives to its laborers while paying them with the lowest possible
wages (Caldin and et.al., 2019). This results into creating an unfair imbalance among the
owners and labourers. Apart from this, Karl also stated that business owners also employ the
social institutions which involves the government, media, any organised religion or the
financial institutions as a tool against the workers with the objective of maintaining their
position of power. Therefore, these inherent inequalities and the exploitative relation among
these two classes results into revolution and rebels against the owners, seizing control of the
means of production along with the abolishment of capitalism (Caihui, 2018). This same
situation can be compared with the current ongoing Covd-19 pandemic situation which has
affected the employment of many and other who are still having jobs are being paid less and
therefore, are exploited as they are not having the required means of production.
Another important 20th century theory is Neoclassical economics which is a broad
theory which mainly focusses on the supply and demand which are the key driving forces
behind the production, pricing along with the consumption of the products and services. The
main assumption of this theory is that the utility to consumers is a crucial factor in respect to
determining the value of the product and services (Kates, 2018). As per this theory it is
being believed that a consumer’s major concern is to maximize the personal satisfaction,
based upon which they undertake the purchasing decisions considering their evaluation
pertaining to the utility of the product.
In contrast to it, there are 21st century economic theories as well which differs from
the 20th century theories. The nudge theory is the is a well-known theory which suggests that
the consumer behaviour can be influenced by the small suggestions or recommendations
along with positive reinforcements (Bogović and Licul, 2018). The main proponents of the

nudge theory states that the well-placed nudges have the potential to reduce the market
failure, saving the money of government along with that encouraging desirable actions in
addition to increasing the efficiency of resource use. But there was argument which are being
made by the economists pertaining to the misuse of the nudges along with encouraging the
consumers to buy the things which they don't really need (Haynes, 2017). With respect to
the present situation, Covid-19 this theory can be effectively linked with as under some
situations the government put the nudges into the right place while in some it failed to do so
which resulted into negatively affecting the needs of the consumers. The government failed to
identify the actual needs of the people during the tough time. Another theory is behavioral
theory which involves the psychological experimentation in order to develop theories
pertaining to the human decision making and has also determined a wide range of biases
which is the outcome of the way people think and feel. It involves changing the way
economists thinks about the consumers or people perception in respect to value and
preferences.
After analyzing these theories, it can be stated that in the modern days, the
businesses are making use of the combination of such theories. Earlier the businesses were
mainly focused on attaining higher profits but now the perception of the businesses have
changed and involves taking care of its workers which supports them in attaining long term
benefits. Thus, these economic theories are having a direct relation with the modern business
practices which helps in effective planning and handling of things.
CONCLUSION
It can be summarized from the above that the business runs on the concepts of
economics which is essential for the organization in understand in order to carry out the
business effectively. The concepts of demand supply are the most crucial one. Lidl requires to
also understand the various economic theories which will help in effectively undertaking the
various business-related decisions pertaining to production, consumer needs and preferences
in the process of decision making. It can be stated that the economic concepts have a
significant part within the business operation and essential for surviving in the market.

REFERENCES
Books and Journals
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