DEM A N D, SU PPLY AN D

ELA STICITY C-TWO

 DEFIN ITIO N O F DEM AN D
In economics demand is defined as consumers' willingness and ability to consume a given good.

To be demand, three conditions must be met

1. Desire to purchase
2. Ability to purchase and
3. Willingness to pay

According to Benham, “Demand for anything, at a given price, is the amount of it which will be bought per unit of time at that price”

Demand is a multivariate relationship, that is, it is determined by many factors simultaneously. Some of the most important determinates of
the market demand for a particular product are its own price, consumers’ income, price of other commodities, consumers’ tastes, income
distribution, total population, consumers’ wealth, credit availability, government policy, past levels of demand, past levels of income, etc.
SU PPLY
Supply is the willingness and ability of producers to create goods and services to
take them to market.
Supply is positively related to price given that at higher prices there is an incentive to
supply more as higher prices may generate increased revenue and profits.
Supply and stock are not the same thing. example of stock and supply will be
suppose a television manufacturer has 20000 television stock, out of which the
manufacturer supplies only 2000 television at prevailing market price. Hence
remaining 18000 units will be called stock and 2000 units will be called as supply.
 Law of Demand
The law of demand states that other
factors being constant (ceteris paribus),
price and quantity demand of any goods
and services are inversely related to
each other. An increase in price will
decrease the quantity demanded of most
goods. On the other hand, a decrease in
price will increase the quantity
demanded of most goods. The inverse
relationship between price and quantity
demanded of a good is known as the law
of demand.
Law of Supply
The law of supply states that all
other factors being equal, as the
price of a good or service
increases, the quantity of that
good or service that suppliers
offer will increase, and vice
versa. The law of supply says
that as the price of an item goes
up, suppliers will attempt to
maximize their profits by
increasing the quantity offered
for sale.
 Factors Affecting
Demand Factor Affecting Supply

Income Technology
Price of other goods and services Input Prices
Taste Weather
Expectations Expectations
The size of the market Number of sellers
Weather Government Policy
Goods in joint Supply
Goods in Competitive
SU PPLY SCH EDU LE A N D
SU PPLY CU RV E Table 2: Supply Schedule

Price of Ice-cream (Per piece) Quantity Supplied

0 0
1 3
2 6
3 9
4 12
5 15
6 18

Figure 2: Supply Curve

 EXTEN SIO N & CO N TRACTIO N
O F DEM A N D O R CH A N G E IN
Q U A N TITY DEM A N DED
 Changes in the price of a commodity causes movements along the demand curve; such
movements are called changes in the quantity demanded.

 If price decreases, then we move down and to the right along the demand curve; this is an
increase in the quantity demanded which is known as extension of demand.

 If price increases, then we move upward and to left along the demand curve, this is a
decrease in the quantity demanded which is called contraction of demand.
EXTEN SIO N &
CO N TRACTIO N
O F DEM A N D
 Assuming other things such as income, tastes and
fashion, prices of related goods remaining constant, a
demand curve DD has been drawn. It will be seen in this
figure that when the price of the good is OP, then the
quantity demanded of the good is OM.

 Now, if the price of the good falls to OP’ the quantity

demanded of the good rises to ON. Thus, there is
extension in demand by the amount MN. On the other
hand, if price of the good rises from OP to OP” the
quantity demanded of the good falls to OL. Thus, there
is contraction in demand by ML.
 IN CR EA SE A N D DECR EA SE O F
DEM A N D O R CH A N G E IN DEM A N D
 Increase and decrease in demand are referred to change in demand due to changes in
various other factors such as change in income, distribution of income, change in
consumer’s tastes and preferences, change in the price of related goods, while Price factor
is kept constant.

 Increase in demand refers to the rise in demand of a product at a given price.

 On the other hand, decrease in demand refers to the fall in demand of a product at a
given price.
 IN CR EA SE & DECR EA SE
IN DEM A N D
 In case of increase in demand, the demand curve  In case of decrease in demand, it shifts to
shifts to right of the original demand curve left of the original demand curve.
 SO M E SIM ILA R TYPE O F
Q U ESTIO N
 True or False: A "change in quantity
demanded" is a shift of the entire demand
curve to the right or to the left. Explain.
 Does a price change cause a movement
along a demand curve or a shift of the
entire curve?
 Can a change in price cause a
shift of the demand curve?
 Will a change in price cause a
movement or a shift?
 Is price a movement along the
demand curve?
 If other factors remain constant, analyze the
effect of own price changes on demand
 If price remains constant, analyze the effect
of other factors’ changes on demand
 How does price create movement along the
demand curve?
 What causes a movement in the demand
curve?
 What causes a shift in the entire demand
curve
MA RKET EQ U ILIBRIU M
TH E RO LE O F EXCESS SU PPLY (SU RPLU S) A N D EXCESS
DEMA N D (DEFICIT)
 CONCEPT OF ELASTICITY
Elasticity is an economic measure of how sensitive an economic factor is to another. In economics, elasticity is the
measurement of the percentage change of one economic variable in response to a change in another. The definition of
elasticity, a measure of responsiveness of consumers to changes in prices or incomes.

The meaning of the price elasticity of demand, which measures the responsiveness of the quantity demanded to changes in
price.

The meaning of the income elasticity of demand, a measure of the responsiveness of demand to changes in income.

The cross-price elasticity of demand measures the responsiveness of demand for one good to changes in the price of another
good.

The meaning of the price elasticity of supply, which measures the responsiveness of the quantity supplied to changes in price
 PR IC E ELASTIC ITY
O F DEM AN D
The price elasticity of demand (sometimes simply called price elasticity) measures how much the
quantity demanded of a good changes when its price changes. The precise definition of price elasticity
is the percentage change in quantity demanded divided by the percentage change in price.
TY PES O F PR IC E ELASTIC ITY
O F DEM AN D
TYPES O F PR ICE ELA STICITY
O F DEM A N D
PR ICE ELA STICITY O F SU PPLY
 FAC TO R AFFEC TIN G
ELASTIC ITY O F DEM AN D
FAC TO R AFFEC TIN G
ELASTIC ITY O F DEM AN D
LIN K FO R TH E CO N CEPT O F
ELA STICITY
https://youtu.be/pKo8LBHhn7s?si=L0qK0VxEFxTv4wyI

Book:1. N_Gregory_Mankiw_Principles_of_Economic- chapter 4 and chapter 5- Page 65-101

(Especially Market Equilibrium -Page -76)

Book-3 - Economics by Paul Samuelson, William Nordhaus (Chapter- 3&4, Page-45)