The Law of demand states that ‘there is a negative relationship between the price of a good and the quantity demanded’ ceteris paribus!
Explain the meaning of this statement. Give practical examples. (4 marks)
How does the Law of supply differ from the law of demand? (2 marks)
Explain, using practical examples any two (2) exceptions to the law of demand.
(4 marks)
Consider the following supply schedule for headsets
Price (ZW)
Quantity Supplied
2
25
4
35
6
45
8
55
10
65
12
75
Plot the curve on a graph (4 marks)
Calculate the elasticity of supply at price K4 and at price K10 (4 marks)
Suppose a rise in cost of production causes the producer to reduce supply by 15 units at every price. Repeat exercise (i) and (ii) above. (8 marks)
Discuss any four (4) determinants of the supply of headsets. (4 marks)
(30 marks)
The statement "there is a negative relationship between the price of a good and the quantity demanded" means that when the price of a good increases, the quantity demanded decreases, and vice versa, ceteris paribus. In other words, all other factors that could influence demand remain constant.
Practical example: If the price of smartphones increases, consumers might decide to purchase fewer smartphones as they become more expensive. On the other hand, if the price of avocados decreases, consumers may buy more avocados because they are now more affordable.
The Law of supply states that ‘there is a positive relationship between the price of a good and the quantity supplied’ ceteris paribus. This means that as the price of a good increases, the quantity supplied of that good also increases, assuming other factors remain constant.
Exceptions to the law of demand include:
1. Veblen goods - These are luxury goods that have an upward sloping demand curve. With Veblen goods, consumers may purchase more of a good as the price increases due to the status associated with owning the product.
2. Giffen goods - Giffen goods are inferior goods that see an increase in quantity demanded as the price rises. This can occur when there are no close substitutes available.
To plot the curve on a graph, the quantity supplied in the supply schedule would be on the y-axis and the price on the x-axis. Connect the points on the graph to form a upward sloping supply curve.
Elasticity of supply at price K4 = ((35-25)/((35+25)/2))/((4-2)/((4+2)/2)) = 0.22
Elasticity of supply at price K10 = ((65-55)/((65+55)/2))/((10-8)/((10+8)/2)) = 0.22
Given a reduction in supply of 15 units at every price, the new supply schedule would be:
Price (ZW) Quantity Supplied
2 10
4 20
6 30
8 40
10 50
12 60
Recalculate the elasticities of supply with the new supply schedule for prices K4 and K10.
Determinants of the supply of headsets include:
1. Input prices - The cost of materials and labor needed to produce headsets will impact supply.
2. Technology - Advances in technology can increase the efficiency of production, increasing the supply of headsets.
3. Number of suppliers - More firms entering the market could increase the overall supply of headsets.
4. Expectations - Expectations of future prices can influence current supply levels.