2.1] Concept of Demand and Law Of demands

Concept of demand

In economics, demand refers to the quantity of a good or service that consumers are willing and able to purchase at a given price. Demand is influenced by a number of factors, including:

• Price: As the price of a good or service increases, the quantity demanded typically decreases. This is known as the law of demand.
• Income: As income increases, the quantity demanded for most goods and services also increases.
• Tastes and preferences: Changes in tastes and preferences can also affect demand. For example, if a new fashion trend emerges, demand for the associated goods may increase.
• Availability of substitutes: If there are close substitutes available for a good or service, an increase in the price of that good or service may lead to a decrease in demand for it.
• Expectations: Expectations about future prices can also affect demand. For example, if consumers expect the price of a good to increase in the future, they may be more likely to purchase it today.

Law of demand

The law of demand states that there is an inverse relationship between the price of a good or service and the quantity demanded. In other words, as the price of a good or service increases, the quantity demanded decreases, and vice versa. This relationship can be illustrated graphically using a demand curve. The demand curve is typically downward sloping, indicating that as the price of a good or service increases, the quantity demanded decreases.

There are a number of reasons for the law of demand. One reason is the law of diminishing marginal utility. As consumers consume more of a good or service, the marginal utility (or additional satisfaction) they derive from each additional unit decreases. As a result, consumers are willing to pay less for additional units of a good or service.

Another reason for the law of demand is the income effect. As the price of a good or service increases, consumers have less money left over to spend on other goods and services. As a result, they may be forced to reduce their consumption of the good or service whose price has increased.

The law of demand is a fundamental principle of economics. It helps to explain how changes in price affect consumer behavior.

2.2] Elasticity of Demand

Elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

The formula for elasticity of demand is:

Elasticity of demand = (% Change in quantity demanded) / (% Change in price)

There are three main types of elasticity of demand:

• Elastic demand: When the elasticity of demand is greater than 1, demand is said to be elastic. This means that a small change in price will lead to a large change in quantity demanded. For example, if the price of gasoline increases by 10%, the quantity demanded of gasoline may decrease by 20%.
• Inelastic demand: When the elasticity of demand is less than 1, demand is said to be inelastic. This means that a change in price will have a relatively small impact on quantity demanded. For example, if the price of insulin increases by 10%, the quantity demanded of insulin may only decrease by 2%.
• Unitary elastic demand: When the elasticity of demand is equal to 1, demand is said to be unitary elastic. This means that a change in price will lead to an equal percentage change in quantity demanded. For example, if the price of a good increases by 10%, the quantity demanded of the good will decrease by 10%.

The elasticity of demand for a good or service is affected by a number of factors, including:

• Availability of substitutes: If there are close substitutes available for a good or service, demand for that good or service is likely to be elastic. For example, if the price of gasoline increases, consumers may switch to using public transportation or carpooling.
• Necessity of the good or service: Goods and services that are necessities are likely to have inelastic demand. For example, even if the price of insulin increases, people with diabetes will still need to buy it.
• Portion of income spent on the good or service: If a good or service accounts for a small portion of a consumer’s income, demand for that good or service is likely to be elastic. For example, a small increase in the price of salt is unlikely to have a major impact on a consumer’s spending.
• Time: In the short run, demand for a good or service is likely to be more inelastic than in the long run. This is because consumers may not have time to find substitutes for a good or service in the short run.

Businesses can use information about the elasticity of demand for their products to make decisions about pricing and advertising. For example, if a business knows that demand for its product is elastic, it may be able to increase its profits by raising prices. However, if a business knows that demand for its product is inelastic, it may be able to increase its profits by lowering prices.

2.3] Concept of Supply and Law Of supply

Concept of supply

In economics, supply refers to the total amount of a good or service that producers are willing and able to sell at a given price. The quantity supplied is determined by a number of factors, including:

• Price: The higher the price, the more suppliers are willing to produce. This is because higher prices mean higher profits.
• Cost of production: The lower the cost of production, the more suppliers are willing to produce. This is because lower costs mean higher profits.
• Technology: New technologies can reduce the cost of production, which can lead to an increase in supply.
• Input prices: The prices of inputs used in production can affect the cost of production. For example, if the price of oil increases, the cost of producing gasoline will also increase. This can lead to a decrease in the supply of gasoline.
• Government policies: Government policies can also affect supply. For example, a tax on a good can lead to a decrease in supply.
• Expectations: Suppliers’ expectations about future prices can also affect supply. If suppliers expect prices to rise in the future, they may be willing to produce more now.

Law of supply

The law of supply states that, all other factors remaining constant, the quantity of a good or service supplied will increase as the price of that good or service increases. This is because higher prices provide suppliers with an incentive to produce more.

The law of supply can be graphically represented by an upward-sloping supply curve. The supply curve shows the relationship between the price of a good or service and the quantity supplied.

Examples of the law of supply

• When the price of gasoline increases, gas stations are likely to order more gasoline from their suppliers.
• When the price of wheat increases, farmers are likely to plant more wheat.
• When the price of labor increases, firms are likely to hire more workers.

Exceptions to the law of supply

In some cases, the law of supply may not hold. For example, if the price of a good or service increases too much, suppliers may be unable to increase production in the short run. Additionally, if suppliers expect prices to fall in the future, they may be willing to produce less even if the current price is high.

Overall, the law of supply is a fundamental economic concept that helps to explain how changes in price affect the quantity of a good or service that is supplied.

2.4] Elasticity of Supply

Meaning of elasticity of supply

Elasticity of supply is a measure of the responsiveness of the quantity supplied of a good or service to a change in its price. In other words, it measures how much the quantity supplied changes in response to a given percentage change in price.

There are five main types of elasticity of supply:

• Perfectly elastic supply: The quantity supplied can change by an infinite amount in response to any change in price.
• Elastic supply: The quantity supplied changes by a greater percentage than the percentage change in price.
• Unit elastic supply: The quantity supplied changes by the same percentage as the percentage change in price.
• Inelastic supply: The quantity supplied changes by a smaller percentage than the percentage change in price.
• Perfectly inelastic supply: The quantity supplied does not change at all in response to a change in price.

Determinants of elasticity of supply

The following factors can affect the elasticity of supply:

• Time: In the short run, suppliers may have limited ability to adjust their production levels. This can make supply more inelastic. In the long run, suppliers have more time to adjust their production levels, making supply more elastic.
• Availability of inputs: If the inputs used to produce a good are readily available, suppliers can easily increase production in response to a higher price. This makes supply more elastic. If inputs are scarce, suppliers may have difficulty increasing production, making supply more inelastic.
• Perishability of the good: If a good is perishable, suppliers may be more likely to reduce production in response to a lower price. This is because they do not want to be left with unsold goods that will spoil. This can make supply more inelastic.
• Number of suppliers: If there are many suppliers in a market, they may be more likely to compete with each other on price. This can make supply more elastic. If there are only a few suppliers in a market, they may have more power to set prices. This can make supply more inelastic.
• Technology: Technological advances can make it easier for suppliers to increase production. This can make supply more elastic.

Examples of elastic and inelastic goods

• Elastic goods: Gasoline, agricultural products, restaurant meals
• Inelastic goods: Cigarettes, electricity, medical care

In general, goods that are easy to produce and have close substitutes are more likely to have elastic supply. Goods that are difficult to produce and have few substitutes are more likely to have inelastic supply.

2.5] Determination of equilibrium price and quantity through demand and supply

The equilibrium price is the price at which the quantity of a good or service demanded by buyers equals the quantity supplied by sellers. At this price, there is no tendency for the price to change.

The equilibrium quantity is the quantity of a good or service that is bought and sold at the equilibrium price.

The demand curve shows the relationship between the price of a good or service and the quantity demanded. The supply curve shows the relationship between the price of a good or service and the quantity supplied.

The equilibrium price and quantity are found at the point where the demand curve and supply curve intersect.

Example

The following table shows the demand and supply schedules for apples:

Price	Quantity demanded (apples)	Quantity supplied (apples)
$1	100	0
$2	90	10
$3	80	20
$4	70	30
$5	60	40

The demand curve is shown in the following graph:

The supply curve is shown in the following graph:

The equilibrium price is $3. At this price, the quantity demanded is 80 apples and the quantity supplied is 20 apples.

Conclusion The equilibrium price and quantity are determined by the interaction of demand and supply. The equilibrium price is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity is the quantity that is bought and sold at the equilibrium price.