Define the Law of Demand and the Law of Supply. Give an example for each.
The Law of Demand states that, all else being equal, as the price of a product or service increases, the quantity demanded by consumers decreases, and vice versa. In simpler terms, when prices go up, people tend to buy less, and when prices go down, people tend to buy more.
To understand and illustrate the Law of Demand, you can follow these steps:
1. Identify a product or service: For example, let's consider the demand for smartphones.
2. Determine the relationship between price and quantity demanded: Suppose that the price of smartphones increases by $100. According to the Law of Demand, we would expect the quantity demanded to decrease.
3. Observe the change in consumer behavior: As the price of smartphones rises, people might rethink their decision to buy them, and some may opt for alternative options or delay their purchase.
4. Quantify the impact: If a decrease in price leads to an increase in quantity demanded, you can express this as a demand curve, showing the inverse relationship between price and quantity demanded.
The Law of Supply, on the other hand, states that, all else being equal, as the price of a good or service increases, the quantity supplied by producers increases, and vice versa. In simpler terms, when prices rise, producers are willing to supply more, and when prices fall, they are willing to supply less.
To demonstrate the Law of Supply, you can follow these steps:
1. Choose a product or service: For example, let's consider the supply of coffee.
2. Determine the relationship between price and quantity supplied: Suppose that the price of coffee increases by $1 per pound. According to the Law of Supply, we would expect the quantity supplied to increase.
3. Observe the behavior of producers: As the price of coffee rises, coffee producers are motivated to produce more and supply it to the market, as they can earn higher profits.
4. Quantify the impact: As you chart the relationship on a graph, you will see an upward-sloping supply curve, indicating that as price increases, the quantity supplied also increases.
Remember, these laws are simplified assumptions used in economic analysis, and real-world scenarios may involve additional factors and complexities.