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DEMAND AND SUPPLY

Demand:
Demands refers to how much (quantity) of a product or service is desired by buyers.

Quantity demanded:
The quantity demanded is the amount of product people are willing to buy at a certain price,
the relationship between price and quantity demanded is known as the demand relationship.

The Law of Quantity Demanded:

Law of demand states that, if all other factors remain equal, the higher the price of a good, the
less people will demand that good. In other words, the higher the price the lower the quantity
demanded. That curve is a downward slope.

Demand Curve:
A graph which shows the relationship between a price of a good and the quantity demanded.

Elasticity:
Elasticity is a measure of how much buyers and sellers respond to charge in the market
conditions.

Elasticity of Demand:
Elasticity of Demand is measure of much the quantity demanded of a good responds to a
change in the price of that good.

Elastic Demand (Elasticity=> 1)

When change in price leads to a more than proportionate change in quantity demanded, the
demanded is said to be elastic.

Example:
When the price of chocolate was Rs. 4 the demand of Sara was 100. Now the price of chocolate
rises from Rs. 4 to Rs. 5, the demand of Sara is decrease from 100 to 50.

By putting formula:
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Q2−Q1
Q1
Q2 +
2
ED =
P 2−P1 5
P
P2 + 1
2
Demand
Value: Q1 = 100

Q2 = 50 4
P1 = Price 4

P2 = 5

Now, 50
50−100
50+100 /2
100
5−4
5+4 /2
50
150
1
9
5
15
1
9

1 9 3
× =3
3 1 1

So the demand of Elasticity is elastic demand.

Inelastic Demand: (Elasticity=< 1)

When a change in price causes a less then proportionate change in quantity demand, demand is
said to be inelastic.

Example:

0 Q
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Our need of water was 50 litters when the price of water was Rs. 60, but when the price rises
up from Rs. 60 to Rs. 80, our demand less of decrease from 50 litters to 40 litters.

Bu putting formula,

Q2−Q1
Q1
Q2 +
2
Ed =
P 2−P1
P 80
P2 + 1
2

Value: Q1 = 50 60
Q2 = 40 Demand
P1 =
60 Price
P2 = 80
40 50
Now,
40−50
40+50/2
80−60
80+ 60/2
−10
90
20
140
1
9
2
14

1 7 7
×
9 1
= 9
=0.86

So the Elasticity of demand is inelastic demand.

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Unit elastic demand: (Elasticity = 1)

When the quantity demanded of a good changes by exactly the same % as price, the demand is
said to has a unit elastic demand.

Example:
When the price of meat was Rs. 300, our demand was the buy 10 kg. but when the price of
meat rises from Rs. 300 to Rs. 600, our demands change from 10 kg. to 5 kg.

By putting formula

Q2−Q1
Q1
Q2 +
2
Ed =
P 2−P1 600
P
P2 + 1
2

Demand
Value: Q1 = 10
30
0
Q2 = 5 Price
P1 = 300

P2 = 600 05
Now,
10
5−10
5+10 /2
600−300
600+300 /2
−5
15
300
900
1
3
1
3
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1 3
× =1
3 1
0 demand.
So the Elasticity of demand is unit elastic

Perfect Inelastic Demand: (Elasticity = 0)

When the quantity demanded of a good does not changes at all to whatever changes in price,
the demand is said to perfectly inelastic.

Example:
If the price of mobile phone is Rs. 1000 we buy 2 mobile phone. If the price of mobile phone
rises from Rs. 1000 to Rs. 2000 and we buy the same quantity of mobile phone.

By putting formula
Q2−Q1 Dem
Q1
Q2 +
2
Ed =
P 2−P1
P
P2 + 1
2

Value: Q1 = 2

Q2 = 2 2000
P1
Price 1000 02
= 1000

P2 = 2000

Now,
2−2
2+2 /2
2000−1000
2000+1000 /2
0
4
1000
3000
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0
4
1
3

0 3 0
× = =0
4 1 0 4

So the Elasticity of demand is perfectly inelastic demand.

Perfectly elastic demand: (Elasticity= ∝)

A demand is perfectly elastic when with a small increase in the price of a good, its quantity
demanded by the consumers drops down immediately to zero.

Example:
A good which has very very low utility for us, which we are just buying for almost nothing. If the
price of such a good rises its demand will become zero.

Supply: $4 Demand

Supply: Supply represents how much the market can offer.

Quantity Supplied:
Quantity supplied Price refers to the amount of a
certain good producers are willing to
supply when receiving a certain price.

Law of quantity Supplied:

Like the law of demand, the law of supply demonstrates
the quantities that will be sold at a certain price. But unlike the law of demand, the supply
relationship shows an upward slope. This means that the higher the price, the higher the
quantity supplied. Producers supply more at a higher price because selling a higher quantity at
a higher price increases revenue.

Supply Curve:
 0 Q
7

A graph which shows the relationship between the price of a good and quantity supplied.

Elasticity:
Elasticity is a measure of how much buyers and sellers responds to change in the market
conditions.

Elasticity of Supply:
Elasticity of supply measures how responsive producers are to a change in the price of good. It
is defined as a measure of the responsiveness of quantity supplied to change in price. Its
formula is;
Q2−Q1
Q1
Q2 +
2
Elasticity of supply =
P 2−P1
P
P2 + 1
2

Elastic Supply: (Elasticity=> 1)

When the percentage increase in the price of a good brings about a large percentage increase
in the supply of good, the supply of good is said to be elastic.

Example:
The quantity supply of Pepsi is 20 and its price is Rs. 4. Now increasing in price from Rs. 4 to Rs.
5 the quantity supply is also increase from 20 to 40.

By putting formula.
Q2−Q1
Q1
Q2 +
2
Es =
P 2−P1
P
P2 + 1
2

Value: Q1 = 20

Q2 = 40

P1 = 4
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P2 = 5

Now,
40−20
40+20/2
5−4
5+ 4/2
20
60
1
9
1
3
1
9

1 9 3
×
3 1
= 1
=3

So the Elasticity of supply is elastic supply.

Inelastic Supply: (Elasticity =< 1)

When the percentage change in price of a good causes a smaller % in quantity supplied the
supply is said to be elastic.

Example:
The quantity supply of telephone is from 40 to 50 and its price rises from Rs. 4 to Rs. 8.

By putting formula
Q2−Q1
Q
Q2 + 1
2
Es =
P 2−P1
P
P2 + 1
2

Value: Q1 = 40
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Q2 = 50

P1 = 4

P2 = 8

Now,
50−40
50+ 40/2
8−4
8+ 4/2
10
90
4
12
1
9
1
3

1 3 1
×
9 1
= 3
=0.33

So the Elasticity of supply is inelastic supply.

Unit Elastic Supply: (Elasticity = 1)

The % change in price brings about the same percentage change in quantity supplied of a good.

Example:
The quantity supple of tomatoes are from 20 to 40 and its price rises from Rs. 5 to Rs. 10.

By putting formula.
Q2−Q1
Q
Q2 + 1
2
Es =
P 2−P1
P
P2 + 1
2

Value: Q1 = 20
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Q2 = 40

P1 = 5

P2 = 10

Now,
40−20
40+20/2
10−5
10+ 5/2

20
60
5
15
1
3
1
3
1 3
× =1
3 1

So the Elasticity of supply is unit elastic supply.

Perfect Inelastic Supply: (Elasticity = 0)

A perfect inelastic supply represents a situation in which sellers sell a fin a quantity of good for
sale, the price increase from 10 to 20 has not led to increase in quantity supplied. The quantity
supplied is totally unresponsiveness to changes in price, the curve vertical = Es = 0.

Example:
If the price of book is double from Rs. 10 and quantity is 50. When we increase in price
the quantity remains the same 50.

By putting formula.
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Q2−Q1
Q1
Q2 +
2
Es =
P 2−P1
P
P2 + 1
2

Value: Q1 = 50

Q2 = 50

P1 = 10

P2 = 20

Now,
50−50
50+50 /2
20−10
20+10 / 2
0
100
10
30
0
100
1
3

0 3 0
×
100 1
= 100
=0

So the Elasticity of supply is unit elastic supply.

Perfect Elastic Supply: (Elasticity = ∝)

Perfectly elastic supply refer to goods that have a price elasticity of supply value equal to
infinity this essentially means that any amount of a good will be supply a prevailing price but
nothing is supplied below this prevailing price.

Example:
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SupposeShaheen flight to the continent an increase to price of flight from London to Pakistan
would encourage people to take the channel tunnel. Also if flights increase people will not be
able afford it and will chose to take their holiday in the UK.