Identify the determinants of supply and
demand; demonstrate the impact of shifts
in both market supply and demand curves
on equilibrium price and output.

The determinants of Demand include price of the commodity, price of close substitutes, income of the consumer (buyer), consumers’ tastes, tax rates, weather, population and advertisements. The determinants of Supply include price of the commodity, cost of production (of the commodity), technology employed in production, population (number) of suppliers, government taxes, consumers’ tastes or preferences and weather conditions.

Explanation: Demand and supply are the main factors that determine the price level in a free market or capitalist economy. The consumers are willing to buy more provided the price is low enough, while on the other hand, the suppliers (producers) are willing to sell more provided the price is high enough, and vice versa. However there are factors (determinants) which determine if the consumers are willing to buy more or less, and also if the suppliers are willing to sell more or less.

We shall briefly examine one of these (mentioned above). Take Income Of The Consumer for example. If a consumer’s monthly earnings falls from $1500 to $1000, and his weekly demand for soda was let’s say 20 bottles, his purchasing power has been cut down/reduced to lesser number bottles per week, say 15 bottles (possibly less than that). As shown in the diagram attached, the demand curve would shift completely from D to D1 (downward shift or shift to the left). This also results in a fall in the equilibrium price from P to P1 and the equilibrium quantity falls from Q to Q1.

In the case of suppliers let us examine weather conditions for example. When it’s summer, sales of sweaters are likely on the low cause consumers have little need for them, but when it’s winter, consumers would be buying lots of sweaters in order to keep warm. Therefore suppliers would gladly produce and supply more and more of sweaters during the winter season. Hence, their supply curve would shift completely to the right, also called an ‘upward shift’ in the supply curve. This is shown in the diagram as a shift from curve S to S1. The result is a fall in the equilibrium price from P to P1 and an increase in the equilibrium quantity from Q to Q2.

(Please see the attached diagram)

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