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Demand
Demand is the want and willingness of consumers to buy a good
or services at a given price. Effective demand is where the
willingness to buy is backed by the ability to pay. For example, when
you want a laptop but you don’t have the money, it is called demand.
When you do have the money to buy it, it is called effective demand.
The effective demand for a particular good or service is called
quantity demanded.
(Individual demand is the demand from one consumer, while
market demand for a product is the total (aggregate) demand for the
product, or the sum of all individual demands of consumers).
In this example, there is a rise in the demand of Coca-Cola from 500 to 600, without any
change in price. A rise in the demand for a product due to the changes in other factors
(excluding price) causes the demand curve to shift to the right (from A to B).
A decrease in price from 80 to 60, will decreased the supply from 700
to 500. The decrease in supply due to changes in price (without the
changes in other factors) is called a contraction in supply.
n this example, there is a rise in the supply of a product from 500 to 700, without any change
in price. A rise in the supply for a product due to the changes in other factors (excluding
price) causes a shift to the right.
A fall in supply from 500 to 300, without any changes in price is also
shown. A fall in the supply for a product due to the changes in
other factors (excluding price) causes a shift to the left.
The market equilibrium price is the price at which the demand and
supply curves in a given market meet.
Price Changes
In this diagram, two disequilibrium prices are marked- 2.50 and 1.50.
At price 2.50, the demand is 4 while the supply is 10. There is excess
supply relative to the demand. When the price is above the
equilibrium price, a surplus is experienced. (Surplus means
‘excess’).
= 66.67 / 25 = 2.67
In this example, the PED is 2.67, that is, the % change in quantity
demanded was higher than the % change in the price. This means, a
change in price makes a higher change in quantity demanded.
These products have a price elastic demand. Their values are always
above 1.
When the % change in demand and price are equal, that is value is 1, it is called unitary
price elastic demand.
When the quantity demanded changes without any changes in price itself, it is said to
have an infinitely price elastic demand. Their values are infinite.
When the quantity demanded changes without any changes in price itself, it is said to
have an infinitely price elastic demand. Their values are infinite.
Producers can calculate the PED of their product and take a suitable
action to make the product more profitable.
Similar to PED, PES too can be categorized into price elastic supply,
price inelastic supply, perfectly price inelastic supply, infinitely price
elastic supply and unitary price elastic supply. (See if you can figure
out what each supply elasticity means using the demand elasticities
above as reference, and draw the diagrams as well!)