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PAN African eNetwork Project
Diploma in Business Management
Managerial Economic & Analysis
Semester - I
Sonia Singh
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Meaning of Demand
Conceptually, demand can be defined as the desire
for a good backed by the ability and willingness topay for it. The desire without adequate purchasingpower and willingness to pay do not becomeeffective demand and only an effective demandmatters in economic analysis and businessdecisions.
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Types of Demand
The demand for various commodities is generallyclassified on the basis of the consumers of the
product, suppliers of the product, nature ofgoods, duration of the consumption of thecommodity, interdependence of demand, period ofdemand and nature of use of the
commodity(intermediate or final.
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•!ndividual and Market Demand •"utonomous and derived demand
•Demand for durable and nondurable goods
•Demand for firm#s product and industryproduct
•Demand for consumers and producers goods
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!ndividual and Market DemandThe quantity of a commodity which an individual iswilling to buy at a particular price during a specifictime period given his money income, his taste andprices of other commodities is called individual#sdemand for a commodity.$n the other hand market demand of a commodity isthe summation of individual demand by all the
consumers. Market demand is a multivariaterelationship and determined by many factorssimultaneously.
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Demand for durable and nondurable goods
Durable goods are those whose total utility is note%hausted in a single or short run use. &uch goods
can be used repeatedly over a period of time.Durable goods may be consumer goods as well asproducer goods.
The demand for nondurable goods depends largely ontheir prices, consumer income and is sub'ect tofrequent change.
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"utonomous and derived demand
The demand for a commodity that arises on itsown out of a natural desire to consume orpossesses a commodity independent of the
demand of other commodities, the demand forthe product is termed as independent.
Commodities like tea and vegetables do come onabsolute terms. $n the other hand if thedemand for a product is tied to the demand forsome parent product, the demand is termed asderived demand.
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Demand for firm#s product and industryproduct
irm#s demand denotes the demand for the productsby a particular company or firm whereas industrydemand is the aggregation of demand for the
product of all the firms of an industry as a whole.
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Demand for consumers and producersgoods
Consumer goods are those, which are, meant forthe final consumption by the consumers or theend users. )roducer*s goods on the other handare used for the production of consumer goods orthey are intermediate goods, which are furtherprocessed upon to convert them into a form to be
used by the end user. "nother distinction is thatthe demand for producer#s goods is deriveddemand and it indirectly depends on the demandfor the consumer goods which the producer goods
is used to produce.
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Determinants of Demand
•$wn )rice•
)rices of related goods→
&ubstitutesand Complements •!ncome•Tastes + )references•
%pectations•)opulation•$ther e%ogenous factors
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Demand "nalysis
-aw of Demand There is !nverse relationshipbetween price and quantity demanded ceterisparibus i.e.,other factors remaining constant.
Demand &chedule " list / table showing
quantity demanded of a good at differentprices, all other things being held constant
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Demand unction The determinants of quantitydemanded when summari0ed in the form offunctional notations are called a demand
function. " typical demand function can bespecified as follows1
23D 4 f ( p%, p5,6..pn, 7, T, y, p, u
Demand Curve 8epresents the relation betweenprice and quantity demanded of a good, all otherthings being held constant.
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Price Qty (D)
1 5
2 4
3 3
4 2
5 1
Demand schedule and demand curve
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• The graph shows that the demand curve is downwardsloping.
• A decrease in the price is reflected y a correspondingincrease in the amount of !uantity demanded.
• This inverse relationship etween price and the !uantitydemanded is depicted in the shape of the demandcurve. The downward slope of the demand curve
• reflects the law of demand" which states that other things
remaining• the same" if the price of any good decreases its !uantity
demanded
• increases and vice versa.
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#ndividual Demand and $ar%et Demand
& Market demand
& The sum of the demands of all the uyers in a
mar%et.
& The mar%et demand curve is the hori'ontal
sum of the demand curves of all uyers in the
mar%et
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$ar%et Demand
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()ceptions of law of demand
1. *iffen goods +if the concerned good is a
*iffen good the rational consumer will go
on decreasing his consumption of the
good as the price falls. This is ecause a
*iffen good is such that the consumerpurchase less and less of the good as its
price falls and vice versa.
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,.-elen effect+a consumer may udge a
good y its price . Thus" when a price
hi%e ta%es place for a good the
consumer may e misguided to thin% thata !uality improvement has ta%en place
and he consumes more of the product.
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/.Consumer e)pectations+
0.$ar%et trend+ in the share mar%et it is
noted that when the price of a particular
share rises its demand also increases to
some people and vice versa.
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hat 2appens to Demand if34
SITUATION: You’re the ower o! " hot #o$ %"&i$
co%'"y:
(") 'eo'e ch"$e their 're!erece !ro%
h"%ur$er* to hot #o$*+
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hat 2appens to Demand if34
SITUATION: You’re the ower o! " hot #o$ %"&i$
co%'"y:
() Your coutry e$oti"te* " #e" w, -hi"
to tr"#e hot #o$* !or e$$ ro*+
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hat 2appens to Demand if34
SITUATION: You’re the ower o! " hot #o$ %"&i$
co%'"y:
(c) the 'rice o! $rou# ee! icre"*e*+
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hat 2appens to Demand if34
SITUATION: You’re the ower o! " hot #o$ %"&i$
co%'"y:
(#) the %ii%u% w"$e ri*e*+
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hat 2appens to Demand if34
SITUATION: You’re the ower o! " hot #o$ %"&i$
co%'"y:
(e) the tr"#e uio thre"te* " *tri&e i!
ower* !"i to %eet their #e%"#*+
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hat 2appens to Demand if34
SITUATION: You’re the ower o! " hot #o$ %"&i$
co%'"y:
(!) ue%'oy%et hit* " ".ti%e hi$h+
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hat 2appens to Demand if34
SITUATION: You’re the ower o! " hot #o$ %"&i$
co%'"y:
($) the 'rice o! u* icre"*e* #ue to "
whe"t *hort"$e+
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Changes in Demand
& Change in the quantity demanded
& A change in the !uantity of a good that people
plan to uy that results from a change in the
price of the good. & Change in demand
& A change in the !uantity that people plan to
uy when any influence other than the price ofthe good changes
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A Change in 5uantity Demanded
• A change in
quantity
demanded is
caused y achange in the price
of the good" which
causes a
movement along
the demand curve.
Shift i th D d C
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D,
D6
D1
5uantity
6
7 r i c e
Shifts in the Demand Curve
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Shifts in the demand curve
• hen the demand curve shifts from D0 to D1"
more is demanded at each price.
• hen the demand curve shifts from D0 to D2 " less
is demanded at each price.
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• Such and increase8decrease in demand can
e caused y+
• A rise 8fall in the price of a sustitute
• A fall8rise in the price of a complement• A rise8fall in income
• A redistriution of income towards those
who favour the commodity
• A change in tastes that favours the
commodity
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hat #s Supply4
• Supply of a commodity refers to the various
!uantities of the the commodity which a seller is
willing and ale to sell at different prices in a
given mar%et" at a point of time.
• Supply is related to scarcity. #ts only the scarce
goods which have a supply price9 *oods which
are freely availale have no supply price.
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Factor affecting the supply of commodity
1/ !e price of commo"ity#- The *u''y o!
co%%o#ity 0ery %uch #e'e# u'o it* 'rice/ There i*
#irect "# 'o*iti0e re"tio*hi' etwee 'rice o!
co%%o#ity "# *u''y/
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2/ !e price of t!e su$stitutes#-The *u''yo! " '"rticu"r co%%o#ity i* i0er*ey
re"te# with the 'rice o! other
co%%o#itie**uch "* the *u''y o! whe"t
wi !" with the ri*e i 'rice o! rice/Thi* i*
#ue to the !"ct th"t ri*e i 'rice o! rice wi
ecour"$e the 'ro#ucer* to 'ro#uce %ore
rice/co*euety "re" u#er whe"t wi ee**er "# the *u''y wi o! #ecie/
/
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/.Change in technology:-#f the change in
technology or new discoveries ring
reduction in price and increase in
production"this will increase the level ofsupply also.
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• 0.Goals of firm:-*enerally the aim of firmis ma)imi'e the profit. :eside thisma)imum sales"ma)imum output or
ma)imum employment is also ta%en as thegoal s of firm..This goals change in themaffect the supply of commodity.sometimesthe producer may continue to ma)imi'e
the supply of commodity without profitsimply to uild the their image and prestigein society
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5/E%pecte" c!ange in price#-I c"*e 'ro#ucer e'ect " icre"*e
i the 'rice they wi try to with#r"w $oo#* !ro% the
%"r&et/-o*euety*u''y wi re#uce /I! 'rice i* e'ecte# to !"i the %"r&et *u''y wi "tur"y icre"*e/
'Natural factors #- Su''y o! $oo# i* " '"rt o! $oo# 'ro#uce/It %e"
th"t %ore 'ro#uctio o! $oo# wi re*ut it* %ore *u''y "# 0ice 0er*"//A$ricutur" 'ro#uctio #e'e#* u'o the "tur" !"ctor* *uch "*
r"i!ertiityci%"tic co#itio etc/ 'ro#uctio %"y e "#0er*ey "!!ecte#
y #rou$ht "# he"0y r"i* "# !oo# etc/
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('Means of transportation an"
communication#-A#eu"te *u''y o!
co%%o#itie* i* %"it"ie# I! the %e"* o!
tr"*'ort"tio "# co%%uic"tio "re
#e0eo'e#/Sc"rcity o! $oo# wi e e** i the
#o%e*tic %"r&eti! the %e" o! thetr"*'ort"tio "# co%%uic"tio "re
'ro'ery #e0eo'e#/
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8.Taation !olicy:-The production of commodity is
discouraged "if heavy duty in on its products is
imposed .#n the same way ta) concession
encourage producer to increase supply. ".#greement among !roducer:-Sometime all the
firms producing the same commodity forms an
association" pool or a syndicate and regular
supply of the goal in such way "so that they mayget ma)imum profit.
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Law of Supply says, supply of the commodity will increasewith increase in price and decrease with decrease in price,other things remaining the same. In other words, price ofany commodity is directly related with the quantity supplied .
According to Dooley, ”the law of supply states thatother things remaining the same , higher the price, the
greater the quantity supplied or lower the price, thesmallest the quantity supplied”.
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When we are talking of supply, we are bound to viewwith the eyes of producers , not the consumers,because it’s producers who are the suppliers.
It is quite natural that in case of increase in prices
producers will like to multiply their prot. For thisthey will be required to sell more quantity of goodsand thus the supply of goods will increase. igherprice in this way induces the sellers to increase thesupply of goods. !n the other hand, low prices reducesthe margin of pro"t so the producer reduces thesupply.
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#he price cannot fall below a certain point .In case theprice falls too much the supply of the product may bestopped .#he price below which the producer will not bewilling to sell is $reserved price”.
#he amount of reserved price depends upon %&'
(.)urability of commodity
*.+stimated price
.-torage charges
.#ransportation charges etc.
/+-+/0+) 1/I2+
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(.#here is no change in price of relatedcommodities. *.#here is no change in technique of production.
.#here is no change in price of factors of production.
.#here is no change in goal of "rm.
3.#here is no e4pectation of change in the price ofthe
commodity.
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7;(S(<TAT#=< => ?A T2;=U*2
SU77?@ SC2(DU?(
• *ives a full account of supply of a
particular commodity
• ?aw of supply can e etter e understood
with the help of supply schedule
• ;elation etween price )B of good and its
supply
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7;(S(<TAT#=< => ?A T2;=U*2 SU77?@
CU;-( • *raphical representation of supply schedule is
supply curve
• #t is an upward sloping curve from left to right• Thus oth supply schedule and supply curve
show law of supply i.e" they show a positiverelationship etween price and supply
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7resentation of law of supply through
supply curve
The graphical representation of the supply schedules supply curve. The
relationship etween the !uantity sellers want to sell during some time
period and price is what economists call the supply curve. #t is an
upward sloping curve from left to right. This shows !ositive relationship
etween price and supply.
Though usually the relationship is positive" so that when price increases
so does !uantity supplied" there are e)ceptions.
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Copyright © Amity University Diagrammatic representation of supply schedule.
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EXCE!"#$S !# !%E L&' #(S)L*
#he law of supply does not apply in following cases%
(.In case of agricultural products whose supply is
a5ected by natural factors.*.In case of perishable goods like food. In case of thesegoods seller is willing to sell more units at decayingprices.
.In case of goods having social distinction. #he supply ofgoods will remain limited even if their prices are high
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-upply curves in very short period6market period7%&
#+ -8119: 28/0+ WI99 ;+ A 0+/#I2A9 9I<+ 1A/A99+9 #! :&A=I-, ;+2A8-+ FI/>- 2A< <!# A)?8-# #+I/ 1/!)82#I!< #!A<: 2A<@+ I< 1/I2+.
9ong 1eriod%&
-8119: !F I<18#- 2A< ;+ 2A<@+),#+ -8119: WI99 ;+81WA/) -9!1I<@ I< #+ 9!<@ 1+/I!).
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$=-($(<T A?=<* A SU77?@ CU;-(
A<D S2#>T => T2( SU77?@ CU;-( +E
+#E+E$! &L#$- & S)L*C)E /
If the quantity supplied increases ordecreases in response to rise or fall inprice of commodity alone assuming other
things remaining the same, it is know asthe movement along the supply curve.
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T$%&% M#' (% T)*
+*,,*)G /*SS(,T%S:-• AB %0T%S* *+ S1//,' :-2 hen
the !uantity supplied increases with the
rise in price.
• :B C*T&#CT* *+ S1//,' +EFwhen
!uantity supplied decreases with the fall in
price.
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When there is change in supply due to factors other than priceof commodity then there is shift in supply curve. <ow two casesarises%
0."$CE&SE "$ S)L*/ We move from original supply curveto the new rightward supply curve.
1.DECE&SE "$ S)L*/ In this case there will be leftwardshift in supply curve
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C#1S%S +*& T$% C&%#S% S1//,'
1. >all in the price of related sustitutesB goods9
,. Changes in the goals of producers9
/. >all in the price of factors of production9
0. #mprovement in technology9G. #ncrease in the numer of firms in the mar%et9
H. Susidies offered y the government9 and
I. hen the firm e)pects a fall in the price of the
commodity.
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C#1S%S +*& D%C&%#S%
S1//,'
+ollo3ing causes are res!onsi4le for decreasein su!!ly :
1. ;ise in the price of the related sustituteB commodities9,. Changes in the goals of the producer9
/. ;ise in the price of factors of production9
0. >all in the level of technology9
G. Decrease in the numer of firms in the mar%et9H. hen susidies are withdrawn 9 and
I. hen the firm e)pects a rise in the price of thecommodity.
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$A;J(T (5U#?#:;#U$
$ar%et e!uilirium)hen the quantity demanded equals thequantity su!!lied53hen 4uyers6 and sellers6!lans are consistent.
(!uilirium priceThe !rice at 3hich the quantity demandedequals the quantity su!!lied.
(!uilirium !uantityThe quantity 4ought and sold at theequili4rium !rice.
$ % ( ili i
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$ar%et (!uilirium
• =nly at
e!uilirium
demand intersects
supply.P P 66+ e!uilirium price+ e!uilirium price
QQ66+ e!uilirium !uantity+ e!uilirium !uantity
$ % t Di ili i
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$ar%et Dise!uiliria
• Excess demand or
shortage e)ists when
!uantity demanded
e)ceeds !uantitysupplied at the
current price.• To eliminate the shortage"To eliminate the shortage"
some consumers aresome consumers are
willing to raise the currentwilling to raise the currentprice.price.
$ % t Di ili i
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$ar%et Dise!uiliria
• Excess supply or
surplus e)ists when
!uantity supplied
e)ceeds !uantitydemanded at the
current price.• To eliminate the surplus"To eliminate the surplus"
some sellers are willing tosome sellers are willing to
lower the current price.lower the current price.
# i D d S l
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#ncreases in Demand or Supply
• Higher demand leads to higher
e!uilirium price and higher
e!uilirium !uantity.
• Higher supply leads to lower
e!uilirium price and higher
e!uilirium !uantity.
Decreases in Demand or
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Decreases in Demand or
Supply
• Lower demand leads to lower
price and lower !uantity
e)changed.
• Lower supply leads to higher
price and lower !uantity
e)changed.
; l ti $ it d f Ch
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;elative $agnitudes of Change
• The relative magnitudes of change in supply andThe relative magnitudes of change in supply and
demand determine the outcome of mar%et e!uilirium.demand determine the outcome of mar%et e!uilirium.
; l ti $ it d f Ch
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;elative $agnitudes of Change
• hen supply and demand oth increase" !uantityhen supply and demand oth increase" !uantity
will increase" ut price may go up or down.will increase" ut price may go up or down.
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/rice: # Market6s #utomatic &egulator
,a3 of market forceshen there is a shortage" the price
rises.
hen there is a surplus" the price
falls.
Sur!lus or %cess Su!!ly
The !uantity supplied e)ceeds the
!uantity demanded.
Shortage or %cess Demand
The !uantity demanded e)ceeds the!uantity supplied.
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5.1. A change in !uantity demanded refers to
aB Contraction along a demand curve
B Shift of the demand curvecB $ovement along a demand curve
dB ()pansion along a demand curve
Ans+ C
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5.,. A change in demand refers to
aB Contraction along a demand curve
B Shift of the demand curve
cB $ovement along a demand curvedB ()pansion along a demand curve
Ans+ :
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• 0. #n case of sustitute goods if the price
of commodity ) increases the demand of
commodity y
• aB ;emain constant
• B #ncreases
• cB Decreases
• dB >luctuates
Ans+
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2ouseholds are on the KKKKKK side of input factorB
mar%ets and on the KKKKKKK side of output productB
mar%ets.• AB Demand9 supply•
:B demand9 demand•
CB Supply9 demand•
DBSupply9 supply
• Answer+
C
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• /. hat happens to demand when price
of the commodity falls
• aB Demand e)pands
• B Demand contracts
• cB <o change
• dB Can e)pand or contract Ans + a
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>irms are on the KKKKKK side of input factorB mar%ets and
on the KKKKKKK side of output productB mar%ets.
• ABDemand9 supply
•:Bdemand9 demand
• CBsupply9 demand
•DB
•
supply9 supply• Answer+
A
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hich of the following is held constant along the demand curve4
• AB7rice of the good
•:B5uantity
•
CB#ncome•
DB•
:oth A and :•
Answer+•
C•
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The Llaw of demandL implies that as prices KKKKKKKKKK
increases.
• ABfall" demand
•:Brise" demand
•
CBfall" !uantity demanded
•DB
rise" !uantity demanded
• Answer+
•C
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According to the law of demand" as prices fall" ceteris
parius"
• ABdemand increases.
•:B
demand decreases.•
CB
!uantity demanded decreases.•
DB
!uantity demanded increases.•
Answer+
D
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According to the law of demand there is KKKKKKKKKK
relationship etween price and !uantity demanded.
• ABa positive
•:Ba negative
•CBeither a positive or negative
•DBa constantly changing
•
Answer+:•
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