Question

Subject: Supply and Demand (Please double space your paragraphs and turn in through WebCampus).

Purpose: Ensure an accurate understanding of the supply and demand curves (learning objective #1 on

the syllabus). Grading will focus on the descriptions, not on writing techniques or style except in regard

to how the writing affects my ability to understand the descriptions.

Process: Your task is to draw graphs of and describe the supply and demand curves. The graphs (parts

1.a. and 2.a.) can be simple, but must be clear and properly identified. Each characteristic (parts 1.b.i

through 1.b.v and 2.b.i through 2.b.v) must be described in a separate 3-5 sentence

(maximum

)

paragraph. In other words, you’re assignment should end up with 2 graphs and ten short paragraphs.

Shorter answers (1 or 2 sentences) are fine if they properly describe the characteristics required (100

points possible).

b. Describe the demand curve with reference to the following characteristics:

i. The demand curve as a schedule of the relationship of price and quantity (Law

of Demand) (I suggest discussing the nature of the intercepts and the nature of

the curve between) (8 points).

ii. The demand curve in terms of marginal benefit of a good to the consumer (8

points).

iii. The demand curve in terms of willingness to pay for a single good (8 points).

iv. The demand curve in terms of the quantity of goods the consumer is willing to

purchase (8 points).

v. Movement along the demand curve versus shifts of the demand curve (8

points).

Answer 1

b. Describe the demand curve with reference to the following characteristics:

i. The demand curve as a schedule of the relationship of price and quantity (Law of Demand)

The demand curve is a graphical representation of the demand schedule. That is, it plots the different quantity demand of a good values against different price values.

It basically represents the negative relationship explained in the law of demand by showing how quantity demanded of a good falls as price increases.

ii. The demand curve in terms of marginal benefit of a good to the consumer

A demand curve basically represents additional benefit a consumer obtains from consumption of each additional unit of a good. Since consumers make purchase decision at the point where marginal cost equals marginal benefit, it means here marginal cost is price of the good and marginal benefit is additional utility obtained from consumption of each additional unit of good.

This implies the demand curve basically plots MC (price) against marginal benefit (quantity demanded of the good).

iii. The demand curve in terms of willingness to pay for a single

A demand curve basically represents additional benefit a consumer obtains from consumption of each additional unit of a good and how much they are willing to pay for the good. Since consumers make purchase decision at the point where marginal cost equals marginal payment made for the good, it means the consumers will be willing to pay an amount equal to the additional benefit received from each additional unit’s consumption.

This implies the demand curve basically plots Willingness to pay (price) against marginal benefit (additional quantity demanded of the good).

iv. The demand curve in terms of the quantity of goods the consumer is willing to purchase

A consumer makes purchase decision the point marginal cost equals marginal benefit. Here, marginal cost refers to price of each additional unit of good and marginal benefit is the increase in utility obtained from the consumption of each additional unit of good. This means at different prices, the consumer will have different MB and thus he will be willing to purchase different quantities of goods based on this analysis. Thus, demand curve will plot price of a good to different units of goods the consumer is willing to purchase (based on marginal benefit)

v. Movement along the demand curve versus shifts of the demand curve

Various factors affect a typical consumer demand curve, ranging from price of the good to consumer income, price of related goods, consumer tastes and preferences etc.

When price of a good changes, it leads to a change in quantity demanded of the good, leading to a movement along the demand curve.

However, when any other factor (apart form price) changes, it changes demand for the good, leading to a shift of the demand curve (to either left of right)