Assignment -2

1.0

How does demand change differently in shift in the entire demand curve and move along the
demand curve. Which factors can cause them in that case? Explain with diagram.

There are two types of demand curve; individual demand curve, which count how much an
individual consumer will purchase in, and market curve, which consist of total market demand.
The demand curve is graphed on X and Y-axes, where price is listed on Y axis and quantity sold
is on the X axis. The demand curve can either shift entirely or experience or experience movement
along part of its curve.

Shifting

The demand curve shifts when consumers change their perceptions about the worth of a product.
If consumers decide they are willing to pay higher prices for a product or want to purchase more
of it, the demand curve shifts to the right. The less consumers are willing to pay for a product, the
more the demand curve shifts to the left. In other words, heightened perceived worth of a product
shifts the demand curve right, while decreased perceived worth shifts the demand curve to the left.
Factors that can shift the demand curve either way include changes in consumer expectations for
a certain product, changes in discretionary income and changes in trends and what is fashionable.

Moving

Unlike shifts in demand curves that are dictated by consumer interest, movement in the demand
curve occurs when the price of a product changes. For example, movement can occur if a candy
manufacturer raises or lowers the price of a certain type of candy. Altering candy prices could
cause consumers to buy more candy or less candy, depending on where the new price is set. The
demand curve itself does not move; rather, there is movement along the curve.

Equilibrium Price

The demand for a product or service is relative to how much supply there is. Many business owners
look to find the "equilibrium price" for the goods or services they offer. The equilibrium price is
the point where the demand curve and the supply curve intersect. The point at which these two
curves intersect creates an equilibrium between the quantity that consumers want of a product and
the amount of that product that companies desire to sell.

The difference between movement and shift in demand curve is concerned:

1. When the commodity experience change in both the quantity demanded and price,
causing the curve to move in a specific direction, it is known as movement in
demand curve. On the other hand, when, the price of the commodity remains
constant but there is a change in quantity demanded due to some other factors,
causing the curve to shift in a particular side, it is known as shift in demand curve.
2. Movement in demand curve, occurs along the curve, whereas, the shift in demand
curve changes its position due to the change in the original demand relationship.
3. Movement along a demand curve takes place when the changes in quantity
demanded are associated with the changes in the price of the commodity. On the
contrary, a shift in demand curve occurs due to the changes in the determinants
other than price i.e. things that determine buyer’s demand for a good rather than
good’s price such as Income, Taste, Expectation, Population, Price of related
goods, etc.
4. Movement along demand curve is an indicator of overall change in the quantity
demanded. As against this, a shift in the demand curve represents a change in the
demand for the commodity.
5. Movement of the demand curve can either be upward or downward, wherein the
upward movement shows a contraction in demand, while downward movement
shows expansion in demand. Unlike, shift in the demand curve, can either be
rightward or leftward. A rightward shift in the demand curve shows an increase
in the demand, whereas a leftward shift indicates a decrease in demand.

Comparison Chart
Basis
Movement in Demand Curve Shift in Demand Curve
Comparison

Movement in the demand curve is when The shift in the demand curve is when, the price
the commodity experience change in of the commodity remains constant, but there is
Meaning both the quantity demanded and price, a change in quantity demanded due to some
causing the curve to move in a specific other factors, causing the curve to shift to a
direction. particular side.

Curve

What is it? Change along the curve. Change in the position of the curve.

Determinant Price Non-price

Indicates Change in Quantity Demanded Change in Demand

Demand Curve will move upward or

Result Demand Curve will shift rightward or leftward.
downward.

Movement in Demand Curve

 Upward movement of the curve from A to C represents a contraction of demand due to the
increase in the price of the commodity from P to P2. Downward movement of the curve
from A to B denotes the expansion of demand due to the reduction in prices of the
commodity from P to P1.

Shift in Demand Curve

Price remains unchanged, the rightward shift of the demand curve from D to D1 is termed as an
increase in demand, as demand goes up from Q to Q1. The leftward shift of the demand curve
from D to D2 is known as a decrease in demand, as demand goes down from Q to Q2.
The basic different between a move along a demand curve and a change in the curve is that the
former is caused by a change in price while the latter is not. A move along the demand curve results
in different quantity demanded at a different price. A change in demand means that a different
quantity will be demanded at a given price than was demanded before the change in demand
occurred. A movement along the demand curve is a simple change in price of good. For example
if a DVD costs $1 and then drops to $0.50, the point on the curve has now moved towards the
lower right.
Shift in the demand curve are caused by five things:

1. Change in the price of related goods; the price of related goods affects the demand for
a certain product. There are two types of related goods, substitute and complementary
goods. For example, if the price of Blu-ray’s discs rose, assuming that DVD’s and Blu-
ray discs can substitute each other, the demand for DVD would increase because few
people will want to buy the more expensive Blu-ray discs. Another example if the price
of DVD players rose, the demand for DVDs would fall because it now costs more for
more consumer to use DVDs.
2. Change in Income of Consumer; if a consumer has more money, they will consume
more. However, if a real world, consumer may lose income but still keep at the same
level of consumption.
3. Change in the consumer expectation; if a newspaper report that some DVDs will fall
because consumer expect less.
4. Change in Consumer preference: if consumer prefer Blu-ray’s discs to DVDs they will
buy more Blu-ray discs and less DVDs.
5. Change in the number of consumer; if there are more consumers, there will be more
consumption and more demand.

Shift in demand will causes shifts in the price level in a free market, no government or procedures
price floors or ceiling in place. An increase demand will cause an increase in a price of the product.

In conclusion, movement along the curve are caused by changes in price while shift is caused by
the above 5 reasons.
Conclusion

Therefore, with the overall discussion, you might have understood, that a movement and shift in
the demand curve are two different changes. Movement in the curve is caused by the variables
present on the axis, i.e. price and quantity demanded. On the flip side, a shift in the curve is because
of the factors which are other than those present on the axis, such as competitors price, taste,
expectations and so on.

Assignment 2 (b)

Answer for (1)

The traditional food corner’s sales within a week is $6.

The total numbers of sales will be $ 300,000 and total revenue is $6*300,000= $ 1,800,000.

No other price gives the food corners this much total revenue.

Answer for (2)

The price elasticity of demand equals.

( (300-400)/350) / (($6-$4)/$5 ) = (0.29) / (0.4)= 0.71

Moving along the demand schedule is lower prices (from $ 10 to $8 t0 $ 6 and ultimately $4). Thus
the elasticity of demand falls in size.

Assignment 3 (c)

(i) The Price of the flour rises

Assume the supply curve is fixed. The unusually price of flour will cause a rightwards shift
in the demand curve, creating short-run excess demand at the current price (P1). Consumers will
begin to bid against each other for the dried noodle, putting upward pressure on the price. The
price of noodles will rise until the quantity demanded and the quantity supplied are equal the new
equilibrium price is at P2. When the price of the flour rises, the customer will stop buying flour
and buy dried noodle instead increasing the equilibrium demand and prices. The market demand
curve for dried noodle will be unchanged and the market supply will shift to left: equilibrium
quantity will decrease and the equilibrium price will rise.

P S1

S2

P1

P2

Q1 Q2 Q

(ii) The price of seasoning and flavors used in making noodle soup fall.

Decrease in the price of seasoning and flavors will causes the demand curve for Noodle
soup to shift from D1 to D2. This will result in a decline in equilibrium price from P1 to P2 and
increase in the equilibrium quantity from Q1 to Q2.

P S1

S2

P1

P2

Q1 Q2 Quantity
(iii) The price of rice vermicelli falls.
As the price of the vermicelli decrease, consumers will buy more vermicelli and less
noodle. The demand for noodle will decrease, causing a decrease in the equilibrium price and
quantity of noodle.

Price

D2 D1

Quantity

(iv) The income of consumer rise and noodle is a normal good.

The income of consumer rise and noodle is a normal good. Normal goods are high
quality things that you find very desirable and plan for assume more of as your income
rises. When there is an increase in the consumer’s income, there will be an increase in
demand for a good. If the consumer’s income falls, then there will be a fall in demand. If
the conception of a particular good falls when income increase, this good is called inferior
good. Inferior goods are perhaps, lower quantity things that you will expected to consume
less of as your income rises.
Normal Goods Inferior Goods

Price Price

S1

S1 S2

S2

D2

D1 D1 D2

Quantity Quantity

S = Increase

D= Decrease

(v). Chemical health risks found in some brand of noodle in the market and ban these brands.
The health risk results in a decrease in supply of some noodles brands. As a result, the
equilibrium price of noodle will decrease, and the equilibrium quantity will decrease.

Price

D S1

S2

Quantity
(vi). Minimum wage rate increase in that country.
Increase in minimum wage rate will cause the demand curve of noodle to shift from D1 to
D2. Thus will result increase in the equilibrium price from P1 to P2 and is increase in the
equilibrium quantity from Q1 to Q2.

Price

P1

P2

D1 D2 Quantity

Q1 Q2

Assignment-2d

The set of government rules and regulation is to control or stimulate the aggregate indicators of an
economy frames the macroeconomics policy. Aggregate indicators involves national income
money supply, inflation, unemployment rate, growth rates, interest rates and etc., to meet the
macroeconomics goals. Two mains regulatory macroeconomics policies are fiscal policy and
monetary policies.

What is Monetary policy?

Historically, the major objective of monetary policy had been to manage or curb domestic
inflation. Monetary policy instruments consists in managing short-term rates and changing reserve
requirements for commercial banks. Monetary policy can be either expansive for the economy
(short-term rates low relative to inflation rate) or restrictive for the economy (short-term rates high
relative to inflation rate). More recently, central bankers have often focused on a second objective:
managing economic growth as both inflation and economic growth are highly interrelated.

What is Fiscal policy?

Fiscal policy consists in managing the national Budget and its financing so as to influence
economic activity. This entails the expansion or contraction of government expenditures related to
specific government programs such as building roads or infrastructure, military expenditures and
social welfare programs. It also includes the raising of taxes to finance government expenditures
and the raising of debt (Treasuries in the U.S.) to bridge the gap (Budget deficit) between revenues
(tax receipts) and expenditures related to the implementation of government programs. Raising
taxes and reducing the Budget Deficit is deemed to be a restrictive fiscal policy as it would reduce
aggregate demand and slow down GDP growth.

Lowering taxes and increasing the Budget Deficit is considered an expansive fiscal policy that
would increase aggregate demand and stimulate the economy. Governments use spending and
taxing powers to promote stable and sustainable growth with fiscal policy. Governments typically
use fiscal policy to promote strong and sustainable growth and reduce poverty. If the economy is
in a recession or if it is “overheating,” then the government should intervene to re-align the growth
of the economy. Fiscal policy can be used in order to lower unemployment rate and increasing real
GDP to eliminate a recessionary gap. To achieve these goals, fiscal policy must change either
aggregate demand (AD) or aggregate supply (AS).

If fiscal policy is designed to change aggregate demand, then it is referred to as demand-side fiscal
policy. However, if the policy is designed to change aggregate supply, then it is referred to as
supply-side fiscal policy. Fiscal policy refers to changes in government expenditure (ΔG) and/or
taxes (ΔT) to achieve a particular macro-economic goal. The main macro-economic goals are as
shown in Figure 1.0:

Figure 6.2: The main macro-economic goals

 The Main Macro-Economic Goals

Price Stability (i.e. low level Economic Growth (i.e.

Low level of unemployment
of inflation) growth in GDP

Since fiscal policy deals with both government expenditures and taxes, it can affect the Federal
budget. However, government expenditures and taxes are not always equal. If government
expenditures are greater than tax revenues, a budget deficit exists. A budget surplus exists if tax
revenues are greater than government expenditures. If government expenditures equal tax
revenues, then a balanced budget exists.

The Role of Government in Economy

The role of government by analyzing both thought of Keynes and Friedman and then prove the
effectiveness of Friedman’s theory. At the final several years of the Great Depression, Keynesian
macroeconomic theory, which shows the importance of government’s role on the economy, has
played an impact on interventionists’ policies. In Keynesian economics, when inefficient economic
outcomes aroused from decisions of private sector, public sector needs to take active measures. By
fiscal policy adjusting taxes and government spending and monetary policy which deals with the
amount of money supplied and credit, government could help stabilize the economic growth rate,
and then plays an impact on price level and employment rate in the process. In the case of the
Great Depression, Keynes said the low unemployment rate were the result of insufficient demand,
thus intervention of government was important to run deficits, increase spending and/or cutting
taxes, and so as to keep people fully employed. According to Bresiger it was the 1970s, economic
growth was weak, resulting in rising unemployment that eventually reached double-digits. The
easy-money policies, which financed huge budget deficits and were supported by political leaders,
were then undertaken by the American central bank, in order to generate full employment. The
great inflation, and the recession that followed, wrecked many businesses and hurt countless
individuals.
 The theory of monetarism puts a stress on the benefits aroused from free market economics and
weaknesses associated with government intervention on the economy. The appropriate economic
role for government is to manage the amount of money in circulation, so as to influence aggregate
output in the short run and finally control the level of prices and inflation rate over longer periods.
In the article, issuing (2010) plays an importance on the money by illustrating that ignoring
monetary factors has led to the worst crisis since the Great Depression related to the asset price
bubbles. Another example which helps prove the effectiveness of monetarism was given by
Congdon (2007). When Margaret Thatcher won the 1979 general election in United Kingdom,
Britain had several inflations for several years, with inflation rate rarely below 10%. Even worse,
the rate had reached 27% by the time of the election. Thatcher implemented monetarism to control
inflation, and successfully reduced the rate to 4% at 1983.There was a global recession at that time,
and Thatcher’s monetarist policies contributed to the success of fighting against the recession,
meanwhile helped Britain become one of the nations which recover economic growth firstly. To
sum up, this essay has examined two theories concerning about the role that government should
take in economy. In Keynesian economy, fiscal policy is particularly an important tool that
government should use when aggregate demand is not insufficient and keep full employment by
running government deficit.
Historical evidence has showed that it was not an efficient way to fight recession. Conversely the
monetarism offers Keynesians a better view of monetary policy. It can be shown that the core
ideology of monetarism can still work well today and monetary factors cannot be neglected, thus
government has a role to determine amount of money supplied as well as the volume of credit in
all aspects, but not interfere with the economy unrestrainedly and ineffectively. So, the government
should not neglect all the policies to recover when the economy is in recession.

What is Supply of Money?

The term ‘the supply of money’ is synonymous with such terms as ‘money stock’, ‘stock of
money’, ‘money supply’ and ‘quantity of money’. The supply of money at any moment is the total
amount of money in the economy. The money supply measures the stock of money in the economy.

 A narrow definition of money (M0) includes the stock of notes / coins and operational deposits at
Bank of England
 A broad definition of money (M4) is notes and coins + deposits in bank accounts+ other liquid
assets.

Increasing Money Supply

 Governments or central banks “print new money” apparently only rarely, but given the fact
of almost persistent inflation throughout decades, the total volume of money in the economy
must grow persistently and significantly anyway.
 If a central bank lends money, does it (in normal circumstances) always only turn the central
bank’s cash into central bank’s (loan) debtors? Is it really absolutely unusual that by giving
a new loan a central bank at the same time also increases its assets and capital (i.e. makes a
capital injection into its cash, increasing that way its cash rather than using only its old cash
to give a new loan)?
 Also, when we are talking about “printing new money”, does it only mean issuing new money
for the government expenses rather than only for the central bank’s loans, new money being
issued in that or other way anyway?

The money supply measures the stock of money in the economy.

 A narrow definition of money (M0) includes the stock of notes / coins and operational
deposits at Bank of England
 A broad definition of money (M4) is notes and coins + deposits in bank accounts+ other
liquid assets.

Ways to increase the money supply

1. Print more notes – usually by Central Banks

2. Central Bank can electronically create money. They can change their bank reserves. This is done
under the policy of quantitative easing.
3. Increase lending of money by Banks – If banks hold a small % of bank deposits as cash, they can
lend out more cash and this increases the money Supply
4. Central Bank buying government securities. i.e. Central Bank pay people in return for bonds. If
the Central Bank Buy Government securities (or corporate bonds) People who were holding the
5. bonds have more money to spend. Banks see illiquid assets become liquid. Therefore, in certain
circumstances this can lead to an increase in the money supply. However, it depends on whether
the bond purchases are sterilised or ‘unsterilized’. Unsterilized means they create money to buy
bonds. In recent decades the money supply has been increasing because:

 Reduction in reserve ratio by banks

 Creation of new types of liquid assets which
 Increased velocity of circulation. – The number of times cash changes hand.

The government increase the money supply, to cause inflation, to prevent deflation. Inflation is a
sustained rise in the general price level; it's when things get more expensive. While this may sound
like a bad thing, it presents no problem as long as average incomes rise at the same pace. Deflation,
is the opposite of inflation, and governments treat it like the plague. we now understand that
inflation is good, and deflation is bad. The productive capacity of the economy, there is a direct
relationship between the growth of the money supply and inflation. For increase the money supply
and direct people to finance only the cost of imported goods. In practice, if the government
increased the money supply, you can’t make people use it to just spend on imports. If you increased
the money supply, some would be spent on imports, some would be spent on domestic goods. For
example, If the government increase money supply and build more missiles, then some people will
have more money. The firm who produces the missiles will get more income. Their workers will
be paid more. In other words, if you print money in the economy, it doesn’t matter where the
money is spent on. The increased money supply will filter into the economy, devaluing the value
of money and causing inflation. If a Government commanded a firm to make missiles without
payment, then the money supply wouldn’t increase. But, if the government printed money to pay
for the production of missiles. The national money supply would have to increase.

Countries increase the money supply for two underlying and related reasons: Politics, and
Economics. Thus the government should decide these factors.

1. Industrial economies require credit. Credit is the trust which allows one party to provide
money or resources to another party where that second party does not reimburse the first party
immediately (generating a debt), but instead promises either to repay or return those resources (or
other materials of equal value) at a later date. In other words, credit is a method of making
reciprocity formal, legally enforceable, and extensible to a large group of unrelated people.
Without credit, it would be impossible to finance most daily activities that we take for granted.

2. Economies expand and contract (or, they prosper and decline and prosper again). This is
called the business cycle. The business cycle or economic cycle and or trade cycle is the downward
and upward movement of gross domestic product (GDP) around its long-term growth trend.[1] The
length of a business cycle is the period of time containing a single boom and contraction in
sequence. These fluctuations typically involve shifts over time between periods of relatively rapid
economic growth (expansions or booms), and periods of relative stagnation or decline
(contractions or recessions).

Business cycles are usually measured by considering the growth rate of real gross domestic
product. Despite the often-applied term cycles, these fluctuations in economic activity do not
exhibit uniform or predictable periodicity.

When economies expand significantly, the economy would require a larger pool of credit, which
means government increases the money supply. At the same time, banks also contribute to this
increase because they practice fractional banking. Fractional-reserve banking is the practice
whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves
equal to only a fraction of its deposit liabilities. Reserves are held as currency in the bank, or as
balances in the bank's accounts at the central bank. Fractional-reserve banking is the current form
of banking practiced in most countries worldwide. The reverse should occur when the economy
declines (or contracts). I will briefly mention the political side of this.

3. Contrary to what advocates of Free Market policy hold is called Capitalism. Capitalism is an
economic system and an ideology based on private ownership of the means of production and their
operation for profit. Characteristics central to capitalism include private property, capital
accumulation, wage labor, voluntary exchange, a price system and competitive markets. In a
capitalist market economy, decision-making and investment are determined by the owners of the
factors of production in financial and capital markets, whereas prices and the distribution of goods
are mainly determined by competition in the market. Industrial societies reflect the collaborative
success between government and business Rass Bariaw's answer to Should we raise taxes on the
rich? Why? . Suffice to say then that government would increase (and decrease) the money supply
to support the economy and sustain certain targeted policies. For examples:
The financial crisis of 2007–2008, also known as the global financial crisis and the 2008 financial
crisis, is considered by many economists to have been the worst financial crisis since the Great
Depression of the 1930s. It began in 2007 with a crisis in the subprime mortgage market in the US,
and developed into a full-blown international banking crisis with the collapse of the investment
bank Lehman Brothers on September 15, 2008. Excessive risk-taking by banks such as Lehman
Brothers helped to magnify the financial impact globally. Massive bail-outs of financial institutions
and other palliative monetary and fiscal policies were employed to prevent a possible collapse of
the world financial system. The crisis was nonetheless followed by a global economic downturn,
the Great Recession. The Federal Reserve The Federal Reserve System (also known as the Federal
Reserve or simply the Fed) is the central banking system of the United States. It was created on
December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial
panics (particularly the panic of 1907) led to the desire for central control of the monetary system
in order to alleviate financial crises. Over the years, events such as the Great Depression in the
1930s and the Great Recession during the 2000s, have led to the expansion of the roles and
responsibilities of the Federal Reserve System. The Financial Crisis of 2007-2009 initially
injected $700 Billion into the banking system. It continues to expand credit up to this day (by
about $10 Billion per month, by purchasing bonds; as of October 2014). The Fed intended to avoid
a depression; a position with clear political implications. This action by the Fed increased the
money supply by $3 Trillion between 2008 and 2014. Examples B). The war on Iraq (2003) and
Afghanistan (2001). Depending on who is counting, these two wars have already cost over $1
Trillion. They are expected to cost an additional $2 Trillion or so (as various operations related to
these wars continue). This was Not money America had in its back pocket. This was credit (or,
another way to say, an increase in the money supply).
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