04 – 14 - 20

Economics with LRT

Law of Supply and Demand (Quiz)

Submitted by: Cabudsan, Solah Fatima C.

Submitted to: Mr. Jan Phillip Mallari

1. Discuss the difference between supply and demand. (25 points)

Demand can be referred to as how much (i.e. quantity) of a service or product is desired
by the buyers. The quantity that is demanded will be the amount of that product that people
are willing to purchase at a certain price; the relationship between quantity demanded and
the price is called the demand relationship.

Whereas, Supply does represent how much the whole market can offer a certain product
or service. The quantity that is supplied can be referred to as the amount of certain good
producers that they are supplying willfully that they receive for a certain price.

Supply has a direct relationship with the price of a product or service which means that if
the price of the same rises, its supply will also increase and if the price falls, then the same
will also fall whereas, demand has an indirect relationship with the price of a product or
service which means that if the price of the falls, demand will rise and vice-versa.

2. What are the non-price factors of demand and give examples for each. 3 only (25 points)

The Law of demand states the relationship of price to the demand. (1) When the price
goes up, the quantity demanded goes down; and (2) when the price goes down, the quantity
demanded goes up. They have an inverse relationship. The non-price factor are those aside
from the price that affects the demand. With this factor, the change is in the demand itself
and not on the quantity demanded. Examples of these are:

a. Tastes and Preferences of the Consumers. Since the introduction of the AirPods by
Apple, there’s a noticeable change of demand for these wireless earphones.
Earphones with wires are out of trend because AirPods is the current preference of
the people and that is until another product catches the taste of the people.
 b. Price of substitute goods. iPhones once dominated the smartphone industry,
however, with the introduction of other brands that is comparable in quality, the top
spot are now dominated by the more affordable brands such as: Huawei, Samsung,
Vivo, and Oppo.
c. Seasonality. The need for goods varies by time of year; the demand of flowers inflates
during Valentine’s day and all souls day.

3. What are the non-price factors of supply and give examples for each. 3 only (25 points)

The non-price factors of supply are also those who affects the supply which is not related
to price. The Law of Supply indicates that the relationship of price and supply is directly
proportional. Examples of these are:

a. Cost of production. Before a product make it to the market, it undergoes a process

that affects its cost. From the delivery which is affected by the cost of oil, to the raw
materials and labor cost. These elements in there own have an unpredictable cost,
which then continuously affects the market value of a product.
b. Technology. Technological changes influence the supply of a commodity. Advanced
and improved technology reduces the cost of production, which raises the profit
margin. It induces the seller to increase the supply. However, technological
degradation or complex and out-dated technology will increase the cost of production
and it will lead to decrease in supply.
c. Government Policy (Taxation Policy). Increase in taxes raises the cost of production
and, thus, reduces the supply, due to lower profit margin. On the other hand, tax
concessions and subsidies increase the supply as they make it more profitable for the
firms to supply goods.

4. Please explain income effect to demand. (25 points)

Income effect refers to the change in the demand for a good as a result of a change in the
income of a consumer. It is important to note that we are only concerned with relative
income, i.e., income in terms of market prices. The income effect is the change in
consumption of goods based on income. This means consumers will generally spend more if
they experience an increase in income, and they may spend less if their income drops. But
the effect doesn't dictate what kind of goods consumers will buy. In fact, they may opt to
purchase more expensive goods in lesser quantities or cheaper goods in higher quantities,
depending on their circumstances and preferences.

The income effect can be both direct and indirect. When a consumer chooses to make
changes to the way he or she spends because of a change in income, the income effect is said
to be direct. For example, a consumer may choose to spend less on clothing because his
income has dropped. An income effect becomes indirect when a consumer is faced with
making buying choices because of factors not related to her income. For instance, food prices
may go up leaving the consumer with less income to spend on other items. This may force
her to cut back on dining out, resulting in an indirect income effect.

The marginal propensity to consume explains how consumers spend based on income. It
is a concept based on the balance between the spending and saving habits of consumers.
Marginal propensity to consume is included in a larger theory of macroeconomics known as
Keynesian economics. The theory draws comparisons between production, individual
income, and the tendency to spend more of it.
References:
https://boycewire.com/perfect-competition-definition/
https://www.educba.com/monopolistic-competition-examples/
https://www.luckscout.com/oligopoly/
https://www.wallstreetmojo.com/monopoly-examples/