CAVENDISH UNIVERSITY – ZAMBIA

ASSIGNMENT BRIEF AND FEEDBACK FORM

STUDENT NAME Banda Memory

STUDENT NUMBER: 107-621

MODULE: Fundamentals of economics

MODULE CODE: ECO 121

ASSIGNMENT NUMBER: 1

DATE HANDED OUT: 22th/08/2023

DATE DUE IN: 30/09/2023

ASSIGNMENT BRIEF

REFER TO THE QUESTION

STUDENT INSTRUCTIONS

1. This form must be attached to the front of your assignment.

2. The assignment must be handed in without fail by submission date (see assessment
schedule for your course)
3. Ensure that submission date is date stamped by the reception stuff when you hand it
in.
4. Late submission will not be entertained unless with prior agreement with the tutor

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 5. All assessable assignments must be word processed.
This assignment is intended to assess the student’s knowledge in all of the following areas.
However, greater emphasis should be given to those item marked with a

(Tutor: - please tick as applicable)

SL ASSESSMENT SKILLS Please Tick
No
1 Good and adequate interpretation of the question

2 Knowledge and application of the relevant theories

3 Use of relevant and practical examples to back up theories

4 Ability to transfer and relate subject topic to each other

5 Application and use of appropriate models

6 Evidence of library research

7 Knowledge of theories

8 Written business English communication skills

9 Use of visual (graphs) communication

10 Self-assessed ‘time management’

11 Evidence of field research

Tutor’s Marks contribution

(Administrative only)
LECTURER’S FEEDBA

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TABLE OF CONTENTS
INTRODUCTION……………..……………………………………………………….….4
QUESTION ONE ................................................................................................................4
QUESTION TWO………………………………………….….…………………………..9
CONCLUSION…………………………………………………………………………….13
REFERENCES………………………………………………………………………….....14

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INTRODUCTION
The relationship between price and goods/services is an essential aspect of market dynamics.
As prices increase, the quantity demanded generally decreases, while the quantity supplied
increases. The equilibrium price occurs when quantity demanded equals quantity supplied,
ensuring a balance in the market. Market equilibrium is a state of stability and efficient
resource allocation. In this study will demonstrate the relationship between price and
goods/services. Lastly will look at Market equilibrium related questions.
QUESTION ONE
(a)
THE LAW OF DEMAND
The law of demand states that the quantity demanded of a good shows an inverse relationship
with the price of a good when other factors are held constant (cetris peribus). It means that as
the price increases, demand decreases. The shape of the demand curve can vary among
different types of goods. Most frequently, the demand curve shows a concave shape.
However, in many economics textbooks, we can also see the demand curve as a straight line.
The demand curve is drawn against the quantity demanded on the x-axis and the price on the
y-axis. The definition of the law of demand indicates that the demand curve is downward
sloping.
It is important to distinguish the difference between the demand and the quantity demanded.
The quantity demanded is the number of goods that the consumers are willing to buy at a
given price point. On the other hand, the demand represents all the available relationships
between the good’s prices and the quantity demanded.

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For example, let's consider the market for smartphones. If the price of the latest smartphone
model increases, people may hesitate to buy or consider purchasing older models or opting
for alternative options. However, if prices decrease, there may be a greater demand for
smartphones as more consumers can afford them.

THE LAW OF SUPPLY

1. The Law of Supply can be understood as a reflection of the cost of production. When the
price of a good or service increases, it becomes more profitable for producers to supply that
good or service. Higher prices can cover the increased costs of raw materials, labor, and other
inputs required for production. This prompts producers to increase their output and supply
more to the market to capitalize on the better profit margins.
2. Another explanation of the Law of Supply is based on the concept of opportunity cost.
Producers have limited resources and face alternative uses for those resources. When prices
for a particular good or service rise, the opportunity cost of supplying other goods or services
decreases. As a result, producers reallocate their resources to produce and supply more of the
higher-priced good or service, as it becomes a more attractive use of their limited resources.
3. The Law of Supply can also be understood in terms of technological advancements and
economies of scale. Technological progress and improved efficiency can reduce production
costs. When prices increase, producers can take advantage of these cost-saving measures and
expand their production capacities, leading to an increase in the quantity supplied.
Additionally, economies of scale can lower average costs as production levels increase,
making it more profitable for producers to supply more at higher prices. The Law of Supply
illustrates the positive relationship between price and quantity supplied, driven by factors
such as production costs, opportunity cost, and technological advancements.

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For example, let's consider the market for Potatos. If the price of coffee increases, Potatos
farmers may be motivated to increase their production to take advantage of higher profits.
However, if prices decrease, farmers may decide to reduce their production or switch to
growing other crops that offer better returns.
Equilibrium and Market Forces
Whenever markets experience imbalances creating disequilibrium prices, surpluses, and
shortages market forces drive prices toward equilibrium. A surplus exists when the price is
above equilibrium, which encourages sellers to lower their prices to eliminate the surplus.
On the other hand, if the price is below the equilibrium level, the quantity demanded exceeds
the quantity supplied, causing a shortage. In this case, sellers may raise their prices due to
increased demand and limited supply, reducing the shortage. As prices increase, the quantity
demanded decreases, and the market moves toward equilibrium.
These dynamics are illustrated by the interaction of demand and supply curves. The
equilibrium price and quantity occur at the point where the demand curve intersects the
supply curve.
The law of demand and supply provides a framework for understanding the behavior of
buyers and sellers in a market. The demand curve demonstrates the inverse relationship
between price and quantity demanded, while the supply curve shows the positive relationship
between price and quantity supplied. The equilibrium point is where these two forces
intersect, determining the market price and quantity. By analyzing and understanding changes
in demand and supply, economists can gain insights into market dynamics and make
informed predictions about price changes and market outcomes.

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QUESTION ONE
(B)
The demand curve slopes downward because individuals tend to purchase more of a
commodity when its price is lower. This inverse relationship between price and quantity
demanded causes the demand curve to have a downward slope. Demand graph indicates that
the quantity demanded of a product gets increased when the price falls, other things
remaining constant.The consumer demand as a function of price is q=d(p). It states that
quantity demanded changes when the price of the product varies.

QUESTION ONE
C)
The supply curve has a positive slope due to the positive relationship between price and
quantity supplied. As the price of a good or service increases, suppliers are motivated to
produce and sell more of it. Conversely, as the price decreases, suppliers have less incentive
to produce and supply the good.
THERE ARE SEVERAL REASONS FOR THIS POSITIVE RELATIONSHIP
1. Profit Incentive: Higher prices generally result in higher profits for producers, encouraging
them to increase their supply to maximize their earnings.
2. Increasing Costs: As production increases, suppliers may encounter diminishing returns
and face higher costs, such as labor or raw material expenses. To cover these rising costs,
suppliers require higher prices to justify increasing their supply.
3. Opportunity Cost: Producers have limited resources and capacity. When they allocate
resources to produce one good, it means they are sacrificing the opportunity to produce
another good. As prices rise, the opportunity cost of producing alternative goods increases,
leading to a shift in resources towards the production of the more lucrative product.
4. Technological Constraints: Certain goods may have limitations in terms of production
capabilities or technological constraints. As prices rise, suppliers may invest in improving
technology or expanding facilities to increase their supply.
QUESTION ONE (D)
If we assume that the price of a good remains constant, changes in other determinants of
demand can lead to shifts in the demand curve. The direction of this shift depends on the
specific determinant being considered. Here are a few examples:

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1. Income: If there is an increase in income, the demand for normal goods tends to increase.
As a result, the demand curve would shift to the right, indicating a higher quantity demanded
at each price level. Conversely, a decrease in income would lead to a shift of the demand
curve to the left.
2. Consumer Preferences: Changes in consumer tastes and preferences can influence demand.
If a particular good becomes more popular or desirable, the demand for it would increase,
causing the demand curve to shift to the right. Conversely, if consumer preferences shift away
from a good, the demand curve would shift to the left.
3. Population: An increase in the population can lead to an increase in demand as there are
more potential consumers. This would result in a rightward shift of the demand curve. On the
other hand, a decrease in population would lead to a leftward shift.
4. Expectations: If consumers have positive expectations about the future, they may increase
their current demand for a good. This could shift the demand curve to the right. Conversely, if
consumers have negative expectations, it could shift the curve to the left.

It is important to note that these determinants of demand interact with each other, making the
analysis more complex. Changes in one determinant may lead to indirect effects on other
determinants, and the final outcome on demand depends on the combined impact of all
factors.

QUESTION TWO
(A)
(i)
A surplus exists when the price is above equilibrium, which encourages sellers to lower their
prices to eliminate the surplus. A shortage will exist at any price below equilibrium, which
leads to the price of the good increasing.
To eliminate this surplus and reach equilibrium, suppliers will have an incentive to lower
their prices to encourage more consumers to buy, while consumers may reduce their demand
due to the higher prices. This downward pressure on the price will continue until the
equilibrium price is reached, where quantity supplied equals quantity demanded, eliminating
the surplus and bringing the market back into balance.
(ii)

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When price prevailing in the market is below the equilibrium price, demand will be more
than supply, i.e., there is excess demand in the market. pressure of excess demand will cause
a rise in market price causing contraction of demand and extension of supply.
To alleviate the shortage and reach equilibrium, suppliers will have an incentive to increase
their prices to maximize their profits, while consumers may reduce their demand due to the
higher prices. This upward pressure on the price will continue until the equilibrium price is
reached, where quantity supplied equals quantity demanded, eliminating the shortage and
bringing the market back into balance.
In both cases, the market will naturally adjust through the forces of supply and demand,
seeking to reach the equilibrium price where the quantity supplied and quantity demanded are
in balance.
When we draw the demand and supply curves on a single diagram, the point of intersection
of these two curves is the point of equilibrium. This is because at the point of intersection the
demand and supply become equal to each other.
The equilibrium price of a commodity is determined at the intersection of the demand and
supply curves. Graphically, the demand curve slopes downward, showing the negative
relationship between price and quantity demanded. The supply curve slopes upward,
indicating the positive relationship between price and quantity supplied. Where the two
curves intersect is the equilibrium point, representing the market price and quantity.
The equilibrium price is determined at the level of output where the quantity demanded is
equal to the quantity supplied. At this equilibrium point, there is no excess supply or excess
demand. It is the price at which buyers and sellers are willing and able to trade in the market,
resulting in a stable balance.

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The equilibrium price is reached because buyers and sellers interact in the market and
respond to price signals. If the price is below the equilibrium price, there is upward pressure
on prices due to excess demand. Suppliers are motivated to increase prices to take advantage
of the higher demand. On the other hand, if the price is above the equilibrium price, excess
supply creates downward pressure on prices. Suppliers lower their prices to attract buyers and
clear the excess supply. Therefore, the equilibrium price is determined at the level of output
where the quantity demanded equals the quantity supplied because it represents a state of
balance in the market, where buyers and sellers are satisfied, and the market clears without
any shortages or surpluses.
QUESTION TWO
(B)
When there is excess demand or excess supply in a market, the equilibrium price will be
ultimately reached through the forces of supply and demand. Let's consider both scenarios
and explain them with a diagram:
1. Excess Demand:
defined as a situation, where the market demand exceeds the market supply at a particular
market price. In other words, if at any price level, the quantity of output supplied by the
producers is lesser than what is demanded by all the consumers in the market, then we face
the situation of excess demand. Symbolically, the situation of excess demand is represented
as: QD(Pe)>Qs(Pe)

2. Excess Supply:
In this scenario, supply exceeds demand at the prevailing price, leading to a surplus. The
diagram will show the supply curve (S) intersecting with the demand curve (D) at a point to
the right of the equilibrium. To reach the equilibrium price, suppliers will realize the excess
supply and lower their prices. As the price decreases, the quantity demanded increases, and
the quantity supplied decreases. This adjustment continues until the price reaches a level
where the quantity supplied matches the quantity demanded, eliminating the surplus and
resulting in the equilibrium price.

Suhedule

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Pric
Quantity Quantity Supplied
e

14 1 7
12 2 6 Excess Supply
10 3 5

8 4 4 = Market Equilibrium

6 5 3
4 6 2 Excess Demand
2 7 1

Ultimately, the equilibrium price is the level at which quantity demanded equals quantity
supplied, ensuring a balance in the market. The adjustment process allows the market to self-
regulate and reach a point where there is neither excess demand nor excess supply.

The process of determination of equilibrium price of a commodity under perfectly

competitive market. With the help of a suitable diagram.

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In a perfectly competitive market, the equilibrium price of a commodity is determined by the
interaction of demand and supply. The process of determining the equilibrium price can be
explained as follows:
1. Demand Curve: The demand for a commodity reflects the quantity consumers are willing
and able to buy at various price levels. The demand curve slopes downward, indicating that as
prices increase, the quantity demanded decreases, and vice versa. This is because of the
inverse relationship between price and quantity demanded.
2. Supply Curve: The supply of a commodity represents the quantity that producers are
willing and able to sell at different price levels. The supply curve slopes upward, indicating
that as prices increase, the quantity supplied also increases, and vice versa. This positive
relationship between price and quantity supplied is due to the profit incentive for producers.
3. Market Equilibrium: The equilibrium price is the price at which the quantity demanded by
consumers equals the quantity supplied by producers. It represents a state of balance in the
market.
The equilibrium price is determined where the demand curve and supply curve intersect. At
this point, the quantity demanded and the quantity supplied are equal, resulting in a stable
market condition. This intersection represents the market-clearing price, where there is no
excess demand or excess supply.
If the price is initially above the equilibrium price, there will be excess supply, leading
suppliers to lower their prices to encourage more buyers. Conversely, if the price is initially
below the equilibrium price, there will be excess demand, prompting suppliers to raise their
prices to match the higher demand.
Through the continuous interaction of demand and supply forces, the market tends to
naturally adjust towards the equilibrium price, ensuring that the quantity demanded and the
quantity supplied are in balance. This self-regulating mechanism is a fundamental
characteristic of perfectly competitive markets.
Price determination in a perfectly competitive market

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CONCLUSION
Supply and demand are both keys to understanding the economy because they reflect the
prices and quantities of consumer goods and services within an economy. According to
market economy theory, the relationship between supply and demand balances out at a point
in the future; this point is called the equilibrium price. By analyzing demand and supply, we
can understand factors that influence buyers and sellers, such as income, preferences, and
costs. Understanding market equilibrium helps determine efficient production levels and price
levels that lead to optimum allocation of resources. Additionally, studying these concepts
allows policymakers to make informed decisions, businesses to effectively plan their
operations, and consumers to make informed choices.

REFERENCES
1. Mankiw, N. G., & Taylor, M. P. (2014). Principles of microeconomics. Cengage Learning.
- This influential textbook by Mankiw and Taylor provides an overview of microeconomics
principles.

2. Samuelson, P. A., & Nordhaus, W. D. (2010). Economics. McGraw-Hill Education.

- Samuelson and Nordhaus' well-known textbook "Economics" covers a wide range of
economic concepts.

3. Blanchard, O., & Johnson, D. (2012). Macroeconomics. Pearson Education.

- Blanchard and Johnson's "Macroeconomics" textbook explores various macroeconomic
topics.

4. Krugman, P., & Wells, R. (2013). Microeconomics. Worth Publishers.

- Krugman and Wells' "Microeconomics" textbook delves into the fundamentals of
microeconomic theory.

5. Varian, H. R. (2014). Intermediate microeconomics: A modern approach. WW Norton &

Company.

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 - Varian's "Intermediate Microeconomics" provides a modern and comprehensive
examination of microeconomic theory.

6. Acemoglu, D., Laibson, D., & List, J. (2015). Microeconomics. Pearson.

- Acemoglu, Laibson, and List's "Microeconomics" explores different microeconomic
concepts, including behavior and policy implications.

7. Mankiw, N. G. (2018). Principles of macroeconomics. Cengage Learning.

- Mankiw's widely-used textbook "Principles of Macroeconomics" offers an introduction to
macroeconomic theory and policy.

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