CAT GD/PI Preparation I Ecomomics #2

By N Shiva Guru|Updated : December 20th, 2016

Hello wonderful people, this CAT GD/PI preparation piece post is a follow up to the one on the Basics of Economics (http://grdp.co/piww7kiev), which showed you the basic graph of Law of Demand and Law of Supply. This post is going to show you shifts in the curves when there are certain changes in the values which we assumed constant (in the previous post, for the ease of calculation: the factors are discussed below)

Law of Demand Curve

We were dealing with the product Mobile Phones here. 

The initial table:

 ScenarioPriceQuantity Demanded
 A10,000 60,000
 B12,000 40,000
 C18,000 30,000
 D20,000 25,000
 E 22,00023,000


1. Change in the price of substitutes

When the price of the substitutes go up, the Entire curve shifts to the left and vice versa: this is because at every point in the graph: A, B, C, D, E, the substitute products are offered at a higher price and a customer would only come back to the mobile company offering the lowest price: for example if the price of Xiaomi Note 3 were to remain constant while the price of Moto G4 increased by 1000, many customers will switch to Note 3. 

2. Change in the price of accessories

When the price of the accessories, like data cable, memory cards, charger etc.,  go up the demand for the product would naturally decrease and the Curve shifts to the right.

The final graph hence looks like this:

byjusexamprep

Law of Supply Curve

We were dealing with the product Power Banks here.

The initial table:

 ScenarioPriceQuantity Supplied
 A 100010,000 
 B 200015,000 
 C 300018,000 
 D 4000 20,000
 E5000 24,000 


1. Price of input/Cost of Production

As it is comprehensible, if the price of input goes up, the cost of production goes up which means the price offered has to be higher and because of this cascading effect, the entire curve will shift to the left. 

2. Price of related goods, Number of suppliers, Technology intervention

All of the above will have manufacturers increasing their produce: if the price of related products (say there is a dramatic increase of power banks made in China over that made in India) go up, there will be more people buying the particular company's product and hence the production will be more and hence the curve will shift to the right. Similarly, when the number of suppliers (say there are more electronic stores popping up in all Tier II Cities) goes up, there will be more people distributing the particular product and hence the supply goes up and the curve shifts to the right.  Likewise, when there is a particular technology which lets you produce more at the same given cost of production, there is an increase in supply and the entire curve shifts to the right. 

The final graph hence looks like this:

byjusexamprep

Stay tuned for more updates, Cheers!!

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