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The Law of Supply The law of supply states that as the price of a product increases the quantity of that

item that will be supplied will also increase. At first this may seem unusual, but that is because we are all accustomed to thinking as consumers. The Law of Demand The law of demand states that as the price of a good or service falls, the quantity of that item which is demanded will increase. If you think about it this is very logical if a Mars Bar only cost $0.50 we would all buy a lot more of them! Differences between change in quantity demanded and change in demand (1) Change in quantity demanded: Change in quantity demanded refers to the change in the amount of a commodity as a result of change in the price of it. Amount demanded rises or falls according to the fall or rise in price. In such a case other factors influencing demand are held constant. The fall and rise in amount demanded due to the change in price is technically called "contraction" and "extension" of demand. The demand function or the demand curve never changes. The change takes place in the same demand curve. The existing demand curve contains the changes in the different price-quantity combination. In case of change in quantity demanded movement takes place along the existing demand curve. (2) Change in demand: 'Change in demand' means changes in demand due to the change in the factors other than price. Those other factors are income, taste and preference, population, future expectation, prices of other related commodities etc. Price remaining constant these factors bring about a change in demand which is called "Change in demand". The change in demand involves "increase" and "decrease" of the demand for a commodity. The change in demand implies a change in the demand function itself. In case of change in demand the entire demand schedule and demand curve change. With an increase in demand curve shifts upward and with a decrease in demand curve shifts downward. Thus change in demand takes place on different demand curves. Supply vs. Quantity Supplied It is extremely important to understand the difference between supply and quantity supplied. Supply refers to the entire relationship between prices and the quantity of this product supplied at each of these prices. should be thought of as "the supply curve." Quantity Supplied refers to one particular point on the supply curve (not the entire curve). refers to how much of the product is supplied at one particular price. is the horizontal distance between the vertical axis and the supply curve.

An increase in supply versus an increase in quantity supplied With an increase in supply: the supply curve shifts to the right. at every possible price, a greater quantity is supplied. An increase in supply might be caused by: an increase in the number of sellers. a reduction in the cost of inputs (such as labor or electricity). a technological innovation that increases output (such as the development of disease resistant crops). unusually good weather (for an agricultural product). expectations (e.g., that the price will be lower in the future).

With an increase in quantity supplied: the price of the product increases. there has been a movement from one point on the supply curve to another point (further to the right) on the same demand curve. An increase in quantity supplied is caused by: an increase in the price of the product

DETERMINANTS OF DEMAND AND SUPPLY: The following determinants cause shifts in the entire demand curve:

change in consumer tastes change in the number of buyers change in consumer incomes change in the prices of complementary and substitute goods change in consumer expectations

The following determinants cause shifts in the entire supply curve:


change in input prices change in technology change in taxes and subsidies change in the prices of other goods change in producer expectations change in the number of suppliers Any factor that increases the cost of production decreases supply. Any factor that decreases the cost of production increases supply.