Graded Assignment for Demand and Supply

1. Define the term Demand and Supply. 4marks

Demand is the willingness and ability of consumers to buy a range of quantities of a good at a range
of prices, during a given time period, ceteris paribus (all other things remaining constant) and supply
is the willingness and ability of suppliers to sell a range of quantities of a good at a range of prices,
during a given time period, ceteris paribus (all other things remaining constant).

2. Identify two non-price determinants of demand and supply and explain each. 6marks
Supply non price determinants:
Sellers’ Expectations: Sellers decide how much to sell based on a comparison of current and
expected future prices.
Number of Sellers: The total number of sellers participating in a market affects how much of a
good is supplied.

Non price determinants of demand:

Substitutes are goods that can be consumed in place of each other, e.g., butter and margarine.
If the price of a substitute good increases, then buyers switch from that good and buy more of
this good. This means that the demand for a good and the price of its substitute move in the
same direction.

Future Expectations: Buyers decide how much to purchase based on a comparison of current
and expected future prices and income. If buyers expect a higher price in the future, then they
buy more of a good today.

3. Explain the difference between a change in demand and a change in quantity demanded.4marks

A change in quantity demanded (an extension or a contraction) id due to a change in price. This
is shown as a movement along the demand curve. A change is due to change in the conditions of
demand. This is reflected by a shift in the demand curve.

4. With the aid of a diagram, explain the effects of an increase in the price of bananas on the
quantity demanded of bananas. 4marks
5. State the law of demand and supply. 4marks
Law of demand: The law of demand states that there is a negative (inverse) relationship
between the price of a good and the quantity demanded. As price increases, the quantity
demanded falls, and vice versa, as the price decreases the quantity demanded will increase.

Law of Supply: The law of supply can be attributed to two even more basic laws:
Law of Increasing Opportunity Cost: This is a principle derived from the production possibilities
analysis stating that the value of foregone production increases as the quantity of good
produced increases. As such, to produce more of a good, sellers need to receive a higher price in
order to cover the increasing opportunity cost.

Law of Diminishing Marginal Returns: This is a principle of short-run production stating that as
more of a variable input is added to a fixed input, then the marginal product of the variable
input decreases. The decrease in this marginal product then causes an increase in the marginal
cost of production. As such, to produce more of a good, sellers need to receive a higher price to
cover the increasing marginal cost.

Total Marks ………….22marks