UNITY
UNIVESITY
ECCONOMIC
ASSIGNMENT
Submitted By: Heaven Abera
Section: 3
ID NO : UUR01054/18
1️⃣ State the law of demand and discuss the main
reason why the law operates.
The law of demand states that:
“Other factors being constant, the quantity demanded of
a good falls when its price rises, and rises when its price
falls.”
This means that price and quantity demanded have an
inverse (negative) relationship.
✔️As price decreases,
✔️quantity demanded increases.
That downward-sloping pattern is exactly what the law of
demand means.
REASONS WHY THE LAW OF DEMAND OPERATES
A) Substitution Effect
The substitution effect occurs when consumers switch
from a more expensive good to a cheaper alternative
when the price of a product rises.
They substitute the good whose price increased with
another similar product.
Example:
• If the price of beef rises, consumers may buy chicken
instead.
• If the price of Coca-Cola goes up, people may switch to
Pepsi.
✔️Because consumers switch to substitutes, the quantity
demanded for the expensive good falls.
B) Income Effect
The income effect happens because a change in the price
of a good affects a consumer’s real income (purchasing
power).
When the price rises, consumers feel poorer even if their
income hasn’t changed, so they buy less.
Example:
• If the price of bread increases, people cannot buy as
many loaves as before because their purchasing power
has fallen.
• If the price of transport fares rises, students may
reduce the number of trips they take.
✔️As real income falls, quantity demanded decreases —
supporting the law of demand.
C)Diminishing Marginal Utility
Diminishing marginal utility states that as a person
consumes more units of a product, the additional
satisfaction (utility) from each extra unit decreases.
Because of this, a consumer will only buy more units if
the price falls.
Example:
• The first bottle of water when you are thirsty gives very
high satisfaction.
• The second gives less,
• The third even less,
• And by the fourth, you hardly want more unless the
price is very low.
✔️Lower utility for extra units means consumers only buy
more at lower prices.
2️⃣ Explain four factors that cause a shift in the
demand curve.
A shift in demand means the whole demand curve moves
right (increase) or left (decrease).
It happens when non-price factors change.
Factors Causing a Shift
A). Change in Income
• Higher income → demand increases (right shift).
• Lower income → demand decreases (left shift).
Example: People buy more electronics when income rises.
B) Change in Consumer Tastes and Preferences
If a product becomes more fashionable or desirable,
demand increases.
Example: Trendy shoes become popular → demand rises.
C) Price of Related Goods (Substitutes and
Complements)
• Substitutes: If the price of tea rises, demand for coffee
increases.
• Complements: If car prices fall, demand for fuel
increases.
D) Change in Population Size
More population → higher demand.
Less population → lower demand
3️⃣ Identify and explain four determinants of
supply.
Supply means how much producers are willing to offer at
a given price.
Determinants of Supply
A. Cost of Production
Higher production costs (wages, raw materials) reduce
supply because producing becomes expensive.
Lower costs increase supply.
B. Technology
Better technology increases efficiency and increases
supply.
Example: Modern machinery increases output in factories.
C. Number of Producers (Sellers)
More firms in the market → higher supply.
Fewer firms → lower supply.
D. Government Policies (Taxes and Subsidies)
• Taxes increase production cost → supply decreases.
• Subsidies reduce cost → supply increases.
4️⃣ Explain three factors that determine the
elasticity of demand for a product.
Elasticity shows how much quantity demanded changes
when price changes.
Factors Determining Elasticity
A. Availability of Substitutes
The more substitutes a product has, the more elastic the
demand.
Example: Soft drinks have many substitutes → elastic.
B. Necessity vs Luxury
• Necessities (bread, medicine) → inelastic demand
• Luxuries (jewelry, vacations) → elastic demand
C. Proportion of Income Spent on the Good
If the good takes a large share of income, demand is
more elastic.
Example: Cars are elastic because they are expensive