Contemporary Business Economics: Law of Demand, Supply, and Theories

This report delves into contemporary business economics, focusing on the application of economic concepts within a business context. It begins by examining the law of demand, illustrating how price changes impact quantity demanded, and includes a real-world example using Morrisons, a UK-based supermarket. The report then explores the law of supply, detailing the relationship between price and quantity supplied, and discusses factors influencing shifts in both demand and supply curves. Furthermore, it provides a comparison and contrast of Keynesian economic theory, including its core principles and criticisms. The report uses diagrams to illustrate key concepts, and concludes with a discussion of how these economic principles can be applied in practical business scenarios, offering a comprehensive overview of fundamental economic principles and their relevance to business decision-making.

CONTEMPORARY
BUSINESS ECONOMICS

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY ..................................................................................................................................3
Task 1...............................................................................................................................................3
Law of demand and its movement and shifts...............................................................................3
Law of supply, movement along the same curve and its shifts...................................................6
Task 2...............................................................................................................................................9
Comparison and contrast between economic theories.................................................................9
REFERENCES................................................................................................................................1
.........................................................................................................................................................1

INTRODUCTION
Business economics is all about application of various economic concepts in the business
activity. It helps in establishing links between various economic factors like profits, losses,
demand, supply and production and application of the same in running business by helping
managers in carrying out their decision making activity in a better way. In this report we will be
discussing law of demand and changing of demand curve with respect to change in factors
affecting it. The concept of law of supply and changing of supply with reference to change in
factors affecting it has also been included in this report. Thereafter, some theories of economics
has been discussed along with its criticisms (Bernal, H., 2020).
Morrisons, a supermarket based in UK has been taken to discuss how law of demand and supply
holds true for this company in the real sense.
MAIN BODY
Task 1
Law of demand and its movement and shifts
Law of demand states that other things and factors remains the same, demand of the
particular goods and its prices has inverse relationship. This means that when the price of certain
goods increases or decreases then its quantity demanded also decreases and increases
respectively. The concept of ceteris paribus has been applied in understanding the concept of law
of demand. Ceteris paribus is a phrase used for indicating something where all other factors
remains unchanged and the occurrence of some event is only due to an occurrence of particular
single event. Law of demand proves to be true only in the case of price of the commodity,
because if the other factors which can influence the demand of the goods also changes then the
law of demand looses its applicability. Other factors which can affect the demand of the
commodity are prices of closely related goods like substitute and complimentary goods, change
in income of the consumers, effect of tastes and preferences of the consumers on demand of the
particular good and government policies. Let us understand the law of demand with the help of
diagrammatic representation of different prices and demand corresponding to it (Buechner,
M.N., 2018).

We can see in the above diagram that at higher price, that is 5 quantity demanded is very
low which is just 10 and as the price start going down to 1 the quantity demanded raised to 60
units. In this report we will be taking an example if the company which is Morrisons operating in
the supermarket industry in united kingdom. Morrisons can see how the law of demand applied
in the real sense when the prices of various goods in which they are dealing changes and its
corresponding effect on the quantity demanded by the consumers. If the price of coffee changes,
say it will rise then the demand of the coffee must be declined from the previously demanded
quantity.
Movement along the same demand curve
When we say that there is a movement along the same demand curve it means that the
demand is increasing known as expansion and demand is decreasing known as contraction of
demand. When the change in the quantity demanded is caused due to the change in the price of
the commodity only then the movement of demand curve in terms of contracting and expanding
can be seen.
Illustration 1: law of demand

Here in this diagram it is indicated that when the price rises from 10 to 12 the demand curve
contracted due to decrease in quantity demanded whereas if the price falls from 10 to 7 then the
demand curve extended due to increase in quantity demanded at lower price (Dean, E., and et.
al., 2020).
In our company which is Morrisons can experience such movement along its demand curve if the
prices of its products like coffee, beauty products, grains, etc. changes say increase or decrease
then their demand curve indicate a movement contraction and extension respectively.
Change in demand curve
When the term change in demand curve is used it means that the whole demand curve has
shifted either right or left from its original position. Such shifting causes due to increase or
decrease in demand of the commodity because of changing in the factors other than the price of
the commodity. These factors which causes shift in demand curve are price of substitute and
complimentary goods changes, rise and fall of income of the consumers, change in taste and
preferences of the consumers and government policy (Dimand, R. W., 2020).
Illustration 2: movement in demand curve

Illustration 3: shift in demand
In the above diagram it can easily be seen that the first curve has shifted to right which is
due to the change in factors other than the price of the good like price of related goods, income
and tastes and preferences. A new demand curve D2 has been constructed to indicate increase in
demand due to change in other factors. On the other hand in the second curve the demand curve
has shifted to left and a new demand curve D2 has been constructed to indicate the decrease in
demand due to change in the other factors.
In our company Morrisons this rightward and leftward shift can be experienced if the demand
rises or falls of its products like coffee, beauty products, grains or any other necessary and luxury
products in which it deals, due to the factors like price of related goods say tea in case of coffee
and change in income of the target customers or may be due to some policy changes in the target
market (Guiso, L., and et. al., 2017).
Law of supply, movement along the same curve and its shifts
Law of supply states that there is a direct relationship between the price of the
commodity and the quantity produced and supplied in the market for sale. In other words, it says
that if the price of the commodity rises then the producer would be desire to produce and supply
more at the higher price to book more profit whereas if the price of the commodity falls then the
producer will decrease the production and supply of that commodity because at lower price he
can't recover its costs of production. The concept of ceteris paribus has been applied also in case
of supply, because the law states that other things and factors remains the same where by

keeping other factors constant, only price has been taken into consideration to prove the law of
supply. Other factors affecting the supply of commodity are price change in related goods,
change in price of factors of production used by the supplier, level of technology, level of
competition and industry size and many other like natural calamities, etc. Let us understand the
concept of law of supply with the help of supply curve where different price level indicate
different amount of quantity supplied (Jetho, P., 2020).
The supply curve is upward sloping from left to right indicating a direct relationship
between price of the good and the quantity supplied of the same. In this diagram it is clearly
shown that at higher price that is 5 the quantity supplied is very high that is 70 and at lower price
of 1 the quantity supplied comes down to 10. So it is proved that the price and quantity supplied
both goes in the same direction.
In the Morrisons example law of supply can be proved to be true if the prices of beauty products
it offers for sale rises then it will increase the supply of such products because they will earn
more profits on it and as against it if the price of some necessary products like wheat and rice
falls for short period then they will decease their supply of such goods for that period.
Movement along the same supply curve
When it is said that there is a movement in the supply curve it means that either the
supply curve has upward or downward movement. The upward movement shows the increase in
the quantity supplied due to corresponding increase in price of the product and reverse is true in
Illustration 4: law of supply

case of decrease in price of the products. The supply curve indicate contraction and extension
due to change in the price of commodity while other factors remains unchanged (Marwala, T.
and Hurwitz, E., 2017).
In this diagram it is clearly indicated how a supply curve contracted due to decrease in quantity
supplied from 55 to 40 with the corresponding decrease in price of the good from 16 to 12. Also,
it shows that the supply curve extended due to increase in quantity supplied from 55 to 75 with
the corresponding increase in price of the good from 16 to 22. In our example of Morrisons this
movement along the supply curve can be experienced when the price of the products like beauty
products sold in the supermarket has been decreases for short period, so the company will restrict
the quantity of supply for that duration to avoid losses.
Change in supply curve
The change in supply curve can be experienced if the quantity supplied changes due to
factors other than the price of the commodity. Such factors other than the price are technology
used in the process of production, changes in tax rates applied on the producers and industry
competition level. Like innovations in technology may results in decrease in the costs incurred in
Illustration 5: movement in supply curve

producing products which accordingly encourages producers to increase the supply of quantity
where the price remains unchanged in the market (Oumar, S. B., 2019).
Rightward and leftward shifts in supply curve
From this figure it has been interpreted that the original supply curve has shifted to left and a
new supply curve S1 has constructed which must be due to negative change in other factors
keeping the price of the good unchanged. Similarly, there is a rightward shift in the supply curve
and a new curve S2 has been constructed to show positive changes in other factors. Morrisons
can experience such shifts in supply curve with the change in some industry norms and
competition.
Task 2
Comparison and contrast between economic theories
Economic theory revolves around economic systems, its problems and solutions for these
problems. It is all about stating in the context of economic framework where arguments are made
on economic behaviour. How an overall economy behaves with the changes in economic factors.
It also states about economic problem and how such problems can be sought out in the best
possible manner. These theories are based on many assumptions and definitions.
Keynesian theory of economics: The theory is given by John Maynard Keynes who is a
british economist. He gave this theory to understand and suggest recommendations to recover
from Great Depression in the year 1930. The main ideas given by the keynes in his theories are:
He says that there is a need of government interference in various economic affairs to smoothens
the economic system. The theory is made in favour of demand where he emphasized on
Illustration 6: shift in supply curve

increment in government expenditure and a corresponding fall in taxes. By doing this the
aggregate demand can be pulled upward. His has criticized many classical theories in his theory
and suggested that there must be presence of active government policy to manage and fight
various economic crisis (Rao, B. B. ed., 2016).
Keynes who believed that the government interference is necessary to revive the economy from
the depressive state and has no considerations naturally adaption of equilibrium. On this belief of
him he has been criticized by many economist on the ground of self achievement of equilibrium
by the market. Others have the view that the businesses would be soon return to the equilibrium
state by itself without any governmental actions.
Friedman theory of economics: This theory has been developed by Milton Friedman
who is was also known as the father of Monetarism. He has given more emphasize on
adjustments in monetary policy where he states the if in the economy the money supply will
increases then there must be increase in the aggregate demand following the increase in
production and employment in the economy. This theory was made to compensate the criticism
of Keynesian theory. He suggested that the increase in money supply should not be rapid, that is
it must be done in a controlled way because the former can create inflationary problems in the
economy while the later can improve unemployment and economic growth. In order to avoid the
state of great depression and recession in the economy government should focus more on
creating liquidity in the economy rather than intervening in the industrial affairs. This theory has
been criticized by many economists on the ground of ignoring the negative impact of continuous
money supply on the price levels and interest rates. Opponents said that increasing money supply
is just a temporary and short term solution to avoid recession because in the long run such
tendency doesn't hold true (Wang, S., and et. al., X., 2019).
Fisher's theory of economics: This theory overcomes many weaknesses of the above
theory of Friedman. This theory has been given by Irving Fisher who focuses on interrelation
between inflation and nominal and real interest rates in his theory. He said that the real interest
rates is equal to the nominal rate of interest minus rate of inflation. The real interest rates must
decreases with the increase in inflation rates but the nominal and inflation rates must be increases
with the same rate. Nominal interest rate reflects the actual return an individual get on its
deposits whereas the real interest rates indicate the purchasing power of the money. He means
that if one go for depositing and earn a nominal interest of 10% but the inflation rate is 4% then

the real interest rate comes to 6% only which indicate the increase in purchasing power of
deposit. He also introduces relationship between interest rates and exchange rate movements
which is known as international effect. In this concept he states that there currency depreciated
with the rise in nominal interest rates of the country which indicate inflationary situation. There
are many criticism raised in regards with this theory like some economists says that in times of
high confidence high real interest rates fails to reduce the aggregate demand in the economy thus
making the argument ineffective. Also, if the nominal interest rate declined then this situation
leads to lower investment and lower spendings. Despite all these criticisms this theory is
considered to be one of the best theory of economics in modern times. And its arguments are still
considered and applied in the real world.
CONCLUSION
From this report it has been concluded that the law of demand and supply holds true in
real sense .These laws actually helps management and producers to decide what to produce and
how much to be produced to achieve an optimum amount of profits which helps in survival of
businesses and achieving their goals. After this some theories of popular economists like Keynes,
Friedman and Fisher's theory of economics has been given along with its criticisms by other
economists and how the later economists has overcome the weaknesses of the former economists
has been discussed. Such theories are actually very helpful in the current era for taking various
economy related decisions and solving economic problems.

REFERENCES
Books and journals
Bernal, H., 2020. Demand and Supply in the Cocaine Market: An Empirical Study. Journal of
Globalization and Development, 1(ahead-of-print).
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., 2020. Macroeconomic Perspectives on Demand and Supply. Principles of
Economics: Scarcity and Social Provisioning (2nd Ed.).
Dimand, R. W., 2020. J. Laurence Laughlin versus Irving Fisher on the quantity theory of
money, 1894 to 1913. Oxford Economic Papers.
Guiso, L., and et. al., 2017. Demand and supply of populism. London, UK: Centre for Economic
Policy Research.
Jetho, P., 2020. Study of Demand & Supply. Studies in Indian Place Names. 40(68). pp.600-604.
Marwala, T. and Hurwitz, E., 2017. Supply and Demand. In Artificial Intelligence and Economic
Theory: Skynet in the Market (pp. 15-25). Springer, Cham.
Oumar, S. B., 2019. Rethinking the Geometry of the Demand and Supply Functions. Romanian
Economic Journal, (74).
Rao, B. B. ed., 2016. Aggregate demand and supply: A critique of orthodox macroeconomic
modelling. Springer.
Wang, S., and et. al., X., 2019. Trajectory analysis for on-demand services: A survey focusing
on spatial-temporal demand and supply patterns. Transportation Research Part C:
Emerging Technologies. 108. pp.74-99.
Online
Economic theories of Milton Friedman. 2017. [Online]. Available through:
<https://www.ukessays.com/essays/economics/economic-theories-of-milton-
friedman.php>
Theory of demand and supply. 2020. [ONLINE]. Available Through:
<https://resource.cdn.icai.org/46697bosfnd-p4-cp2-u3.pdf>
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