Answer to Question #47882 in Microeconomics for Asad Badvi

Question

Q1. Explain the law of demand. Why does a demand curve slope downward? How a market demand curve is derived from individual demand curves?
Q2. What are the determinants of demand? What happens to the demand curve when any of these determinants change? Distinguish between a change in demand and a change in the quantity demanded, noting the cause(s) of each.
Q3. KEY QUESTION What effect will each of the following have on the demand for small automobiles such as the Mini Cooper and Smart car?
a. Small automobiles become more fashionable.
b. The price of large automobiles rises (with the price of small autos remaining the same).
c. Income declines and small autos are an inferior good.
d. Consumers anticipate that the price of small autos will greatly come down in the near future.
e. The price of gasoline substantially drops.
Q4. Explain the law of supply. Why does the supply curve slope upward? How is the market supply curve derived from the supply curves of individual producers?

Answer 1

Q1. The law of demand states that the quantity demanded and the price of a commodity are inversely related, other things remaining constant. If the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in quantity of good demanded by the consumer will be negatively correlated to the change in the price of the good. There are, however, some possible exceptions to this rule (Giffen goods and Veblen goods).
Q2. The five determinants of demand are:
- Price of the good or service.
- Prices of related goods or services (These are either complementary, which are things that are usually bought along with the product in demand. They could also be substitutes for the product in demand).
- Income of those with the demand.
- Tastes or preferences of those with the demand.
- Expectations (These are usually about whether the price will go up).
The change in demand is a movement of the demand curve, caused by the determinants of demand and a change in the quantity demanded is a movement along the curve, caused by the change in price.
Q3. KEY QUESTION What effect will each of the following have on the demand for small automobiles such as the Mini Cooper and Smart car?
a. Small automobiles become more fashionable - demand increases.
b. The price of large automobiles rises (with the price of small autos remaining the same) - demand increases.
c. Income declines and small autos are an inferior good - demand increases.
d. Consumers anticipate that the price of small autos will greatly come down in the near future - demand increases.
e. The price of gasoline substantially drops - demand increases.
Q4. The law of supply is a fundamental principle of economic theory which states that, all else equal, an increase in price results in an increase in quantity supplied. In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes. This means that producers are willing to offer more products for sale on the market at higher prices by increasing production as a way of increasing profits.