State the laws of demand and supply and explain the factors that shift the demand and supply curves.
How to lay out the answer. Follow the frame, then write it in your own words.
1 · State the law of demand. Other things equal, price and quantity demanded are inversely related. Give the reasons: substitution effect, income effect, diminishing marginal utility.
2 · State the law of supply. Other things equal, price and quantity supplied are directly related, because higher prices make extra output profitable.
3 · Draw both curves. [Diagram: downward-sloping D and upward-sloping S, axes Price and Quantity, a rightward and leftward shift shown]
4 · Demand shifters.
Income (normal and inferior goods)
Prices of substitutes and complements
Tastes, expectations, number of buyers
5 · Supply shifters.
Input costs and technology
Weather
Taxes and subsidies, number of sellers
6 · Movement versus shift. Own price changes cause movements; other determinants shift the whole curve.
7 · Sri Lankan business link. Weather shifts tea supply; incomes and fashion abroad shift demand for Sri Lankan apparel.
8 · Conclude. Demand and supply together set market prices, so firms must watch every shifter, not only their own price.
Scoring tip: Label the axes (Price, Quantity) and the curves (D, D1, S, S1) on every diagram. Unlabelled diagrams lose marks.
