State+the+law+of+demand+and+distinguish+between+movements+along+the+demand+curve+and+shifts+of+the+demand+curve.

=== 22. (a) State the law of demand and distinguish between movements along the demand curve and shifts of the demand curve. (10)   (b) Explain, with the help of diagrams, the effect of an increase in the price of petrol is likely to have on    (i) The market for cars. (Complementary good)   (ii) The market for coal. (15) ===

a) The Law of Demand: A microeconomic law that states that ceterus paribus, as the price of a good or service increases, the quantity demanded for the good or service will decrease and vice versa.   - The movement along a demand curve occurs when there is a change in the price of good, therefore leading to a change in the quantity demanded of the good. The quantity demanded of a good or service is basically the total amount of a good or service that is demanded at any given point in time regardless of whether the market is in equilibrium.  A shift in the demand curve occurs when a non-price determinant of demand has been affected such as consumer tastes and preferences, expectations, the consumer population changes, the price of related goods (substitutes and compliments) and money incomes (normal goods and inferior goods)

b) (i) [|Econ._Diagram.jpg] [|Econ_Diagram_2.jpg]

As a result of petrol and cars being complimentary goods, an increase in the price of petrol from P1 to P2 will lead to a decrease in quantity demanded from Q1 to Q2. As a result of this increase in the price of petrol, the demand in the market for cars will decrease from D1 to D2, therefore leading to a decrease in price from P1 to P2 and a decrease in the quantity demanded from Q1 to Q2. (For complimentary goods, as the price of one of the goods increases, the demand for the other good would decrease because the change is being caused by a non-price factor)

(ii) [|Econ._Diagram.jpg] [|Econ_Diagram_3.jpg] Since petrol and coal are substitutes, as the price of petrol increases from P1 to P2, the quantity demanded will decrease from Q1 to Q2. As a result of the increase in price of petrol, the demand curve for coal will shift from D1 to D2, because consumers would now prefer to buy petrol instead of coal. This leads to an increase in price from P1 to P2 and an increase in the quantity demanded for coal from Q1 to Q2. (For substitute goods, as the price of good increases, people will start looking for other substitutes and purchasing those substitutes that have a lower price. Therefore, the substitution effect comes into play.)