Description
Your task is to interpret each graph by stating the
following:
·
Describe the rise or fall in the equilibrium
price and quantity.
·
Describe the factors that may have caused the
supply or demand curve to shift to the left or right.
·
Please identify which determinant or
determinants of demand or supply would have accounted for a shift in the supply
or demand curve.
Explanation & Answer
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DETERMINATION
OF EQUILIBRIUM PRICE a) Interaction
of supply and demand, equilibrium price and quantity In
perfectly competitive markets the market price is determined by the interaction
of the forces of demand and supply. In such markets the price adjusts upwards
or downwards to achieve a balance, or equilibrium,
between the goods coming in for sale and those being requested by purchases.
Demand and supply react on one another until a position of stable equilibrium
is reached where the quantities of goods demanded equal the quantities of goods
supplied. The price at which goods are changing hands varies with supply and
demand. If the supply exceeds demand at the start of the week, prices will
fall. This may discourage some of the suppliers, who will withdraw from the
market, and at the same time it will encourage consumers, who will increase
their demands. This is known as buyers
market. when the supply is high the demand is low
b) Supply curve and demand shifts are caused by factors other than own price of a commodity. Some of these major causes include:
· Production costs – a function of factor prices.
· Technology
· Government policy (taxes & subsidies)
· Natural factors/events (e.g weather, pests, diseases etc)
· Prices of other related goods (substitutes & complements)
· Transport and communication
· Political stability/atmosphere
· Future expectations
· Changes in the supply of the product with which the product in question is in joint supply e.g beef & hides; petrol & paraffin.
· Changes in the goals of a firm
· Ease of entry
·
Time,(c) Determinants of demand and supply :
· Productivity/efficiency – skill and expertise
· Real wage rate (the proportion of TC accounted for by labor cost)
· Mobility and the marginal rate of technical substitution between labor and other factors of production particularly capital.
· Technology – depending on the resource mix
· Demand for goods that labor help produce (final product) – elasticity of demand for the final product.
· Availability and efficiency of other factors of production
· Government policy
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