Session1_SuggestedAnswerkeyEON102-1 - ECON102 N.Aman...

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ECON102: N.AmanSession 1: Discussion Question: Suggested Answers marked in Blue.1) Draw a demand and supply diagram of a commodity you buy every day for your own consumption or a hypothetical commodity, say X, and show the equilibrium price and quantity demanded and supplied in the diagram. What assumptions have you made? Under what conditions these demand and supply curve changes (shift) and what happens then to the equilibrium price and quantity you have just identified(determined)? What is the conceptual difference between changes in quantity demanded or supplied as compared to changes in demand and/or supply?Price of XD1D2S2S121Quantity demanded and SuppliedThe above diagram shows two different equilibrium points (1 & 2) under two sets of D and S functions. For each of those sets of D & S conditions, the assumption is ceteris paribus (other things than its own price remaining the same). If the assumptions are not valid, the D and/or S curves will shift and a new equilibrium price and quantity will be established. The movement from equilibrium 1 to equilibrium 2 is the consequence of violation of ceteris paribus assumption. Such movement can be happened due to the changes in the values of other factors affecting the D and S curve. For example, the changes of cost of production will affect the S curve to shift. The changes in consumers’ income, taste, or the changes in price of substitute or complimentary goods of X will shift the D curve.For more details, please see the following explanation with specific examples (I have also posted in your session 1 discussion board in advance to read).Suppose you have a commodity X and its price is Px to determine the market equilibrium price and quantity based on the principle of economics in terms of the law of demand and the law of supply.
Deamnd function Dx = f (Px Py Pz Income, taste, social and political status, war, etc.), where, Px is its own price, Py = price of Y, Pz is price of z, as y and z could be substitutes and/or complimentary goods of X. Note: Dx =f(…) means Demand for commodity X is a function of …. As a general expressionSupply function Sx = g (Px, Py, Pz, Cost of production, weather condition, war, income growth of consumers, technological advancement, expected profits, etc.)Note: Sx =g(…) means Supply for commodity X is a function of …. As a general expressionNow the law of demaand states that if Px increases, quantity demanded will decrease and vice versa, ceteris paribus(other variables like Py, Pz, ......stay with the same values). It means the D curve is downward sloping and price changes would change the quantity demanded in opposite direction and thus moving along the D-curve.The law of Supply states that if Px increases, quantity supplied will increase and vice versa, ceteris paribus (other variables like Py, Pz, ......stay with the same values). It means the S curve is upward sloping and price changes would change the quantity supplied in the same direction and thus moving along the S-curve.

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