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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.

Jul 13th, 2015

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  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



(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

Please let me know if you need any clarification. I'm always happy to answer your questions.
Jul 13th, 2015

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