Demand and Supply Analysis

Demand
Ability backed by willingness to pay
Demand Curve
Relationship between the quantity of a good
that consumers are wiling to buy and the price of
the good
Qd = Qd (P)

Demand Curve slopes downwards to the right.
When the demand curve shifts to the right, the
market clears at a higher price and a larger
quantity and vice versa

Shifting of a Demand Curve
Shifting of a demand curve is caused by other
factors influencing demand and not price. With
an increase in the quantity demanded, the DC will
shift upwards to the right and with an decrease in
quantity demanded, the DC will shift to the left
Substitutes and Complimentary Goods
Substitutes are two goods for which an
increase in the price of one leads t an increase in
the QD of the other. Compliments are two goods
for which an increase in the price of one leads to
a decrease in the QD of the other

Supply
Quantity offered for sale at a given price
Supply Curve
Relationship between the quantity of a good
that producers are willing to sell and the price
of the good
Qs = Qs(P)
Supply Curve slopes upwards to the right

Shifting of a Supply Curve
When the supply curve shifts to the right, the market
clears at a lower price, and a larger quantity. When it
shifts to the left, the market clears at a higher price and
a smaller quantity
Both demand and supply curves shift from time to
time. Consumers disposable incomes change as
economy grows. The demand for some goods shift with
the seasons, with changes in prices of related goods, or
with changing preferences. This will cause the DC to
shift. Likewise, wage rates, capital costs, and the prices
of raw materials also change from time to time, and
these changes shift the supply curve

The Market Mechanism
Equilibrium (or market clearing price) price
that equates the QD to the QS
Market mechanism tendency in a free
market for price to change until the market
clears
Surplus QS exceeds QD
Shortage QD exceeds QS


Elasticities of Supply and Demand
Elasticity means a percentage change in one
variable resulting from a 1 percent increase in
another
Types of Elasticity:
Price Elasticity of Demand
Ep = Q/Q P/P
Income Elasticity of Demand
Ei = Q/Q I/I
Cross Elasticity of Demand
Ce = Qb/Qb Pm/Pm


Degrees of Elasticity:
Perfectly Elastic
Relatively Elastic
Unitary Elastic
Relatively Inelastic
Perfectly Inelastic

Point Elasticity
Measuring elasticity at one point on a
demand curve. Elasticity at mid point is
equal to 1, at a higher point is greater than 1 ,
and a lower point is less than 1
Arc Elasticity
Measuring elasticities on two points on a
demand curve
Ep = P1+P2/Q1+Q2 / P1-P2/Q1-Q2