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Magerial Economics

Magerial Economics

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Published by ttwahirwa

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Published by: ttwahirwa on Jul 18, 2009
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08/14/2010

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Question 1.
The law of demand states that; holding other factors constant, the higher the price the lower thequantity demanded and the lower the price the higher the quantity demanded. The law explains anegative relationship between price and quantity demanded of the product. This can further beexplained by the demand curve illustrated below:PriceQuantity demandedAt a low price (p1), the quantity demanded is high (q1), and at a high price (p2) the quantity islow (q2).A shift in demand curve arises when there is a change in demand of a commodity due to achange in other factors affecting demand other than price. Such factors may lead to a decrease indemand hence a back ward shift in the demand curve from (do-d1), or in other instances theymay lead to an increase in the demand of a commodity hence a forward shift from (do-d2), as inthe illustration below:
 
This shift in demand is usually caused by a number of factors which include among others thefollowing:A change in consumer tastes and preferences. When consumers begin to consume less of a product because of their changes in preferences, the demand of that price will reduce at aconstant price. This will lead to a shift of the demand curve downwards to the left. However if the consumers tastes change positively, then there may be an increase in the demand of that product even if the price is high. For example, if clothes are off fashion, the demand may shiftdownwards even if the price is low, and fashionable garments will have an increased demandeven if the price is high. The change in demand will therefore be a result of changes in preferences not price.The change in the income of the consumer. When there is an increase in the income of theconsumer, there will be an increase in the quantity demanded at prevailing prices. A decrease inthe income may also lead to a decrease in the quantity demanded of the product. This willtherefore lead to a shift of the demand curve outwards and inward respectively.Weather and climatic conditions may also lead to s shift in the demand curve. There are some products that are consumed seasonally, for example winter jackets. In winter the demand of such products will be high towards winter and that will lead to an increase in demand hence a shift of the demand curve out wards. However a demand for similar products may drastically fall withthe onset of summer, which may cause a shift of the demand curve inwards.The size of the population is yet another important factor in this respect. An increase in the population may lead to an increased in quantity demanded of a product without consideration of the price levels, hence a shift of the demand curve out wards to the right. For example the
 
demand for products in China tends to be bigger than that of similar products in Norway, becauseof the differences in the population.A change in the demand of a compliment. For complimentary goods, an increase in the demandof one may lead to an increase in the demand for the other hence an outward shift of the demandcurve. For example an increase in the demand for cars automatically increases the demand for fuel. A decrease in the demand of a compliment may also lead to a decrease in the demand of theother. If less cars are bought into the market, then we expect a decrease in the demand for fuel,hence an in ward shift of the demand curve.An increase in the price of the substitute. If the price of X for example increases, consumers willconsume the next substitute to that product Y.This will lead to the shift of the demand curveoutwards of commodity Y despite the constant price.

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