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The document discusses the theory of supply and demand, defining demand as the willingness and ability of consumers to purchase goods influenced by various factors. It explains the demand function, types of demand, the law of supply, and the importance of equilibrium price in balancing supply and demand. Additionally, it addresses consumer and producer surplus, along with common questions regarding demand types and factors affecting demand shifts.

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Karrina Daure
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4 views2 pages

Document

The document discusses the theory of supply and demand, defining demand as the willingness and ability of consumers to purchase goods influenced by various factors. It explains the demand function, types of demand, the law of supply, and the importance of equilibrium price in balancing supply and demand. Additionally, it addresses consumer and producer surplus, along with common questions regarding demand types and factors affecting demand shifts.

Uploaded by

Karrina Daure
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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TOPIC 2 : Theory of Supply & Demand

The text explores the theory of demand and supply, outlining concepts such
as demand function, types of demand, and exceptions to the law of demand.
Demand is defined as the consumer’s willingness and ability to purchase
goods or services, influenced by factors like price, income, and preferences.
The demand function is expressed mathematically, illustrating how various
determinants affect quantity demanded. Several types of demand, including
individual, market, direct, derived, joint, and composite demand, are
discussed. The law of supply states that as prices rise, the quantity supplied
also increases. The text also details the determinants of supply, including
production costs and government interventions, and highlights the
significance of equilibrium price in a market. Additionally, it covers consumer
and producer surplus, emphasizing their roles in economic transactions.

Key Insights

Demand is effective only when desire is coupled with the ability and
willingness to pay.

The demand function mathematically expresses how various factors


influence the quantity demanded.

There are different types of demand, including individual, market, derived,


and composite demand, each with unique characteristics.

The law of supply indicates a direct relationship between price and quantity
supplied, driven by profit motives and production costs.

Equilibrium price is critical as it balances the quantity demanded with the


quantity supplied, preventing shortages or surpluses.

Frequently Asked Questions

What is the difference between individual demand and market demand?

Individual demand refers to the quantity of a good a single consumer is


willing to purchase at various prices, while market demand is the total
quantity demanded by all consumers in a market combined.
What are Giffen goods, and why do they violate the law of demand?

Giffen goods are inferior goods for which demand increases when prices rise,
defying the law of demand. This occurs because consumers may reduce their
consumption of more expensive alternatives, leading them to buy more of
the inferior good.

What factors can cause a shift in the demand curve?

Factors such as changes in consumer income, tastes and preferences, prices


of related goods (substitutes and complements), and advertising can cause a
shift in the demand curve.

How does equilibrium price affect consumer and producer surplus?

Equilibrium price maximizes consumer and producer surplus by balancing


the quantity demanded and supplied. Consumer surplus increases when
consumers pay less than what they are willing to pay, while producer surplus
arises when producers sell at a higher price than their minimum acceptable
price.

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