Tutorial 2 Demand and Supply Theory 1.

. Why will a rational consumer increase the quantity demanded of a good when the price of the good falls, and decrease the quantity demanded of a good when the price of the good rises.

When the price of good decreases, consumers will increase the quantity demanded of the good because when the price falls, the good will become cheaper. Consumers purchasing power will increase. With the same amount of income, consumers can purchase more goods. When the price of good increases, consumers will decrease the quantity demanded of the good because when the price increases, the good will become more expensive. Consumers purchasing power will decrease. With the same amount of income, consumers can purchase fewer goods.

2. Explain the difference between the following concepts:

a) Movement along a demand curve Change in quantity demanded due to change in the price of the good. When the price increases, the quantity demanded will increase contraction of demand. When price decreases, quantity demanded will increase expansion of demand. (Include figure and elaboration)

b) Shift in a demand curve Shift of a demand curve due to changes in factors other than the price of the good itself. For example, when consumers income increases, the quantity demanded will increase. (Include diagram and elaboration)

3. Explain the law of supply.

When the price of good increases, the quantity supplied will increase with the assumption of ceteris paribus. When the price of good decreases, the quantity supplied will decrease with the assumption of ceteris paribus.

4. Explain three factors that influence supply.

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The price of the goods itself Level of technology Production costs Government policies Number of producers (Explain each one)